Legal Aspects of Financial Services Regulation and the Concept...

L E G A L A S P E C T S O F

F I N A N C I A L S E R V I C E S

R E G U L AT I O N A N D

T H E C O N C E P T O F A

U N I F I E D R E G U L AT O R

Kenneth Kaoma Mwenda

LAW, JUSTICE, AND

DEVELOPMENT SERIES

The regulation and supervision of financial services has traditionally beenorganized around individual agencies, each with distinct and separateresponsibilities for banking, securities, and insurance. The services andproducts of the financial sector, however, have evolved significantly inrecent years. In response, there has been a trend among some countriestoward restructuring the financial supervisory function, in particular creatingunified regulatory agencies (agencies that supervise two or more of theseareas). But there is still little evidence of broadly accepted standards of bestpractice for the structuring of these unified agencies. Until there is a longertrack record of experience with unified regulators, it is difficult to come tofirm conclusions about their optimal organizational structure.

Legal Aspects of Financial Services Regulation and the Concept of a UnifiedRegulator examines legal and policy considerations of creating a regulatoryand institutional framework for unified financial services supervision. Thebook analyzes different regulatory and institutional constraints that acountry might face as it moves towards the introduction of a unifiedsupervisory agency. The book also highlights favorable conditions andfactors that could support the introduction of such a unified agency. Theauthor lays out important jurisprudential and interdisciplinary issues thatneed to be considered when developing regulatory and institutional modelsof unified financial services supervision.

Kenneth Kaoma Mwenda is senior counsel in the Legal Vice Presidency ofthe World Bank. A Rhodes Scholar, the author holds a PhD in Law from theUniversity of Warwick (UK), where he also served as a Law Lecturer. He alsoholds law degrees from Oxford University (UK) and the University of Zambiaas well as an MBA degree from the University of Hull (UK). The author, aCertified Anti-Money Laundering Specialist (ACAMS, USA), is a recognizedexpert in the fields of international and comparative corporate law andfinancial services regulation, and has published extensively in these fields.

LE

GA

L A

SP

EC

TS

OF

FIN

AN

CIA

L S

ER

VIC

ES

RE

GU

LA

TIO

N A

ND

T

HE

CO

NC

EP

T O

F A

UN

IFIE

D R

EG

UL

AT

OR

LA

W, JU

ST

ICE

, AN

D

DE

VE

LO

PM

EN

T S

ER

IES

ISBN 0-8213-6459-6

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

wb112742

Placed Image

Other Titles in the Law, Justice, and Development Series

The Transit Regime for Landlocked States: International Law and

Development Perspectives (2006)

by Kishor Uprety

The Human Right to Water: Legal and Policy Dimensions (2004)

by Salman M. A. Salman and Siobhán McInerney-Lankford

Conflict and Cooperation on South Asia’s International Rivers:

A Legal Perspective (2002)

by Salman M. A. Salman and Kishor Uprety

Regulatory Frameworks for Dam Safety: A Comparative Study (2002)

by Daniel D. Bradlow, Alessandro Palmieri and Salman M. A. Salman

Available in French (2003). Also available in Chinese (2002) through the

World Bank Office in Beijing, and in Russian (2003) through VES MIR

Publishers, Moscow

The Legal and Regulatory Framework for Environmental Impact

Assessments: A Study of Selected Countries in Sub-Saharan Africa (2002)

by Mohammed A. Bekhechi and Jean-Roger Mercier

Legislating for Sustainable Fisheries: A Guide to Implementing the 1993

FAO Compliance Agreement and 1995 UN Fish Stocks Agreement (2001)

by William Edeson, David Freestone and Elly Gudmundsdottir

Also available in French (2004)

Legal Aspects of Financial Services Regulation and theConcept of a Unified Regulator

Law, Justice, and Development

The Law, Justice, and Development series is offered by the Legal Vice Presidencyof the World Bank to provide insights into aspects of law and justice that are rel-evant to the development process. Works in the series present new legal andjudicial reform activities related to the World Bank’s work, as well as analyses ofdomestic and international law. The series is intended to be accessible to a broadaudience as well as to legal practitioners.

Series Editor: Salman M. A. SalmanEditorial Board: Dominique Bichara, Hassane Cisse, Alberto Ninio, Kishor Uprety

Legal Aspects of Financial Services

Regulation and the Concept of a

Unified Regulator

Kenneth Kaoma MwendaSenior CounselLegal Vice PresidencyThe World Bank

THE WORLD BANKWashington, D.C.

© 2006 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: [email protected]

All rights reserved

1 2 3 4 09 08 07 06

This volume is a product of the staff of the International Bank for Reconstruction and Development /The World Bank. The findings, interpretations, and conclusions expressed in this volume do not neces-sarily reflect the views of the Executive Directors of The World Bank or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries,colors, denominations, and other information shown on any map in this work do not imply any judge-ment on the part of The World Bank concerning the legal status of any territory or the endorsement oracceptance of such boundaries.

Rights and Permissions

The material in this publication is copyrighted. Copying and/or transmitting portions or all of this workwithout permission may be a violation of applicable law. The International Bank for Reconstruction andDevelopment / The World Bank encourages dissemination of its work and will normally grant permis-sion to reproduce portions of the work promptly.

For permission to photocopy or reprint any part of this work, please send a request with completeinformation to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA;telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.

All other queries on rights and licenses, including subsidiary rights, should be addressed to the Officeof the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422;e-mail: [email protected].

ISBN-10: 0-8213-6459-6 eISBN: 0-8213-6460-XISBN-13: 978-0-8213-6459-8 DOI: 10.1596/978-0-8213-6459-8

Library of Congress Cataloging-in-Publication DataMwenda, Kenneth Kaoma.

Legal aspects of financial services regulation and the concept of a unified regulator / Kenneth Koama Mwenda

p. cm — (Law, justice, and development)Includes bibliographical references and index.ISBN-13: 978-0-8213-6459-8 ISBN-10: 0-8213-6459-6

1. Financial institutions—Law and legislation. 2. Administrative law. 3. Banks and banking—State supervision. I. Title. II. Series.

K1066.M945 2006346.73'082—dc22

2005057741

v

Contents

List of Tables and Figures vii

Foreword ix

Abstract xi

Acknowledgments xiii

Acronyms and Abbreviations xv

Chapter 1 Designing a Sound Regulatory Framework for FinancialServices Supervision 1

1.1 Introduction 11.2 “Regulation” Defined 51.3 Designing a Framework for Financial Services Supervision 61.4 General Statutory Powers of a Regulatory Body 121.5 Conclusion 16

Chapter 2 Promoting the Independence of a Financial Services Regulator 19

2.1 Introduction 192.2 Independence and the Financial Services Regulator 192.3 The Example of Central Bank Independence 222.4 Independent but Accountable 252.5 Arguments For and Against the Independent Regulator 312.6 Conclusion 34

Chapter 3 The Concept of a Unified Financial Services Regulator 37

3.1 Introduction 373.2 The Unfolding Debate 383.3 Examples of Unified Regulators 453.4 Deciding Whether to Unify Financial Services Supervision 473.5 A Contingency Approach 483.6 Lessons Learned from Experience 493.7 Conclusion 55

vi Contents

Chapter 4 Frameworks for Unified Financial Services Supervision:Latvia, the Scandinavian Countries, and the UnitedKingdom 57

4.1 Some Preliminary Issues 584.2 The Latvian Model 594.3 Structure of the Financial and Capital Market Commission 634.4 Strategic Goals of the Commission 714.5 Other Aspects of the Regulatory Framework 734.6 Unified Financial Services Supervision in the

Scandinavian Countries 744.7 Unified Financial Services Supervision in the

United Kingdom 824.8 Recent Regulatory Developments in the United Kingdom 844.9 Conclusion 87

Chapter 5 Conclusion 89

Appendix 1 The Estonian Financial Supervisory Authority Act, 2001 93

Appendix 2 The Hungarian Financial Supervisory Authority Act, 1999 123

Appendix 3 The Latvian Law on the Financial and Capital Market Commission 2001 135

Select Bibliography 149

Index 153

List of Tables and Figures

Table 1.1 Financial Services Supervisory Models in the European Union 8

Table 3.1 Structuring Unified Regulators: Processes and Obstacles 39

Table 3.2 Regulatory Structures in Selected Countries as of July 2000 49

Table 4.1 Latvia: Structure of the Financial System at End-2000 62

Figure 4.1 Structure of the Financial and Capital Market Commission 64

vii




by Kishor Uprety










Publishers, Moscow








ix

Foreword

Over the years, financial regulation and supervision in many countries has beenorganized around specialist agencies that have distinct and separate responsibili-ties for banking, securities, and insurance. In recent years, however, there hasbeen an emerging trend in some countries towards restructuring the financialsupervisory function, and in particular creating unified regulatory agencies(agencies that supervise two or more of these areas). The fact that a number ofcountries are now moving towards integrating the different supervisory functionsinto a single agency, and that different types of financial services and productscontinue to spring up in the financial sector of many countries, are indications ofthe changing global landscape of the financial services industry. Equally impor-tant as indicators of the evolving course of financial services regulation areincreases in the number of countries where universal banking is practiced and inthe numbers of parent and subsidiary companies providing different types offinancial services and products.

This study examines the policy bases of different countries adopting variousregulatory and institutional models of unified financial services supervision andaddresses some of the key characteristics of these models. The study also high-lights the progress achieved by the unified regulators in adopting a consistentframework for the regulation and supervision of all financial intermediaries theyoversee. Practical problems faced by countries in setting up unified regulators areidentified, and the study highlights important legal and policy issues that shouldbe considered when developing regulatory and institutional models of unifiedfinancial services supervision.

The Legal Vice Presidency is pleased to offer this publication and hopes thatit will provide better understanding of financial services regulation and, moregenerally, of the relationship between law and financial sector development.

Roberto DañinoSenior Vice President and General Counsel

The World Bank

September 2005




by Kishor Uprety










Publishers, Moscow








Abstract

This study deals with legal and policy issues underpinning the development andstrengthening of the regulatory and institutional framework for unified financialservices supervision. The study discusses developments in a number of jurisdic-tions, among them Australia, Canada, Estonia, Germany, Hungary, Ireland,Latvia, Malta, the Scandinavian countries, the United Kingdom, and the UnitedStates.

Chapter 1 examines conceptual issues to be taken into account in designing asound regulatory and institutional framework for financial services supervision.The chapter also provides a working definition of “regulation” and delves into theintricacies of designing the appropriate regulatory framework. Chapter 2 ana-lyzes the concept of an independent financial services regulator, arguing that aunified regulator that is both independent and accountable would help promotethe development of a sound financial sector. Chapter 3 discusses the concept ofa unified regulator, examining the question of whether every country shouldadopt a model of unified financial services supervision. Chapter 4 provides coun-try studies, addressing the efficacy of the framework for unified financial serv-ices supervision in Latvia, the United Kingdom, and the Scandinavian countries.Finally, Chapter 5 spells out policy recommendations and possible constitutionaland legal challenges that might be encountered when a country is consideringunifying its regulation of financial services.

xi




by Kishor Uprety










Publishers, Moscow








Acknowledgements

I would like to extend my thanks and appreciation to colleagues who served asreviewers of this book: Gerry N. Muuka, Professor and Assistant Dean of theBusiness School, Murray State University, Kentucky, USA; Jose De LunaMartinez, Senior Financial Economist, Financial Sector Operations and PolicyUnit, World Bank; and Peter R. Kyle and Nagavalli Annamalai, both Lead Coun-sels, Financial, Private Sector and Infrastructure Development Practice Group(LEGPS), Legal Vice Presidency, World Bank. I am grateful to all of them fortheir insightful and valuable comments on the earlier drafts of this book.

My thanks also go to World Bank colleagues Roberto Dañino, Senior VicePresident and General Counsel; David Freestone, Deputy-General Counsel(Advisory Practice Groups); Elizabeth Adu, Deputy-General Counsel (Opera-tional Practice Groups); Salman M. A. Salman, Lead Counsel, Environmentaland Socially Sustainable Development and International Law (LEGEN); andVijay S. Tata, Chief Counsel, LEGPS, for the support rendered toward the publi-cation of this book. Further, my thanks go out to Alex E. Fleming, my formermanager at the World Bank, for raising an intellectual curiosity in me on impor-tant aspects of unified financial services supervision, and to Shéhan de Sayrah,Counsel, LEGEN, for his editorial assistance.

And I cannot stop without thanking my many good friends and family mem-bers, including professional colleagues, whose names, if I were to list them all,would occupy a whole chapter in this book. I thank them all for their support overthe years.

xiii




by Kishor Uprety










Publishers, Moscow








Acronyms and Abbreviations

APRA Australian Prudential Regulatory Authority

ASIC Australian Securities and Investment Commission

BOJ Bank of Jamaica

BOZ Central Bank of Zambia

CAD Capital Adequacy Directive

CFTC Commodity Futures Trading Commission

CIS Commonwealth of Independent States

EU European Union

FATF Financial Action Task Force

FSA Financial Services Authority

FSC Financial Supervisory Commission

FSMC Financial Services and Markets Compensation Scheme

FSS Financial Supervisory Services

GDP gross domestic product

IMF International Monetary Fund

MPC Monetary Policy Committee

OECD Organisation for Economic Co-operation and Development

OSFI Office of the Superintendent of Financial Institutions

PIA Pensions and Insurance Authority

ROCHs Recognized Overseas Clearing Houses

ROIEs Recognized Overseas Investment Exchanges

SEC Securities and Exchange Commission

SFC Securities and Futures Commission

SROs self-regulatory organizations

xv




by Kishor Uprety










Publishers, Moscow








C H A P T E R 1

Designing a Sound Regulatory Frameworkfor Financial Services Supervision

1.1 Introduction

There is a noticeable dearth of literature for lawyers and law reform institutionson how to structure, or what to consider when setting up, a unified financial serv-ices regulator.1 While economists have been quick to put pen to paper on both col-lateral and substantive issues relating to the topic,2 not much has been written bylegal scholars. This book endeavors to fill that gap. The book closes the dividebetween law and economics on the topic of a unified financial services regulatorand provides an interdisciplinary exposition of the law. The book fleshes out prac-tical legal and policy issues to be considered when a sound regulatory and insti-tutional framework is being set up for supervision of financial services.

A central thesis of the book is that until there is a longer track record of expe-rience with unified regulators, it is difficult to come to firm conclusions about therestructuring process itself and the optimal internal structure of such agencies.Underscoring this thesis is the view that there is hardly any evidence of broadlyaccepted standards of best practices for structuring unified financial servicessupervision. The design of a regulatory model of unified financial services super-vision has in many cases been driven by country-specific conditions and a desire

1

1 On the concept of a unified financial services regulator, see generally, K. K. Mwenda &A. Fleming, International Developments in the Organizational Structure of FinancialServices Supervision: Part I, 16(12) J. Intl. Banking L. 291–298 (2001) (hereafter Inter-national Developments Part I ); and K. K. Mwenda & A Fleming, International 7–18(2002) (hereafter International Developments Part II). See also K. K. Mwenda, IntegratedFinancial Services Supervision in Poland, the UK and the Nordic Countries, 10(2) TilburgFor. L. Rev. 144–168 (2002); E. Ferran, Examining the UK’s Experience in Adopting aSingle Financial Regulator Model, 28 Brook. J. Intl. L. 257 (2003), http://islandia.law.yale.edu/ccl/papers/symposium10-21-03/2-4Panel2Ferransingleregulator.pdf (accessedMay 25, 2004); and E. Daemestri & F. Guerrero, The Rationale for Integrated FinancialServices Supervision in Latin America and the Caribbean, Sustainable DevelopmentDepartment Technical Paper Series; IFM-135 (Inter-American Development Bank 2003),http://www.iadb.org/sds/doc/IFM-2003-135-Integrating_Financial_Sup-E.pdf (accessedMay 25, 2004).2 This view is evident from the increasing amount of literature that is being churned outby economists—most of that work is referenced in this book—on the topic of a unifiedfinancial services regulator.

2 Legal Aspects of Financial Services Regulation

by some countries to adopt what appear to be current international trends inmodels of financial sector regulation.

To encourage a better understanding of how to structure an efficient and effec-tive regulatory and institutional framework for supervision of more than onesegment of financial services, the book begins by examining the basis for andobjectives of financial services regulation, highlighting the different roles regu-lators must play. This analysis is designed to provide the reader with a conceptualframework to underpin the central thesis of the study. A discussion of the enforce-ment powers of a regulator, and an analysis of whether or not the regulator fol-lows a rules-based model, is based on government policies for introducing aunified regulator. The closely related discussion of the disparities in organiza-tional structure and unified regulatory frameworks in different countries demon-strates the absence of best practices in this field.

Against this backdrop, Chapter 1 sets in context the conceptual and theoreti-cal framework underpinning the thesis, highlighting the historical developmentof the concept of a unified financial services regulator. An examination of thecritical issues in establishing a sound framework for the supervision of financialservices is laid out here. The chapter first introduces the main thesis before exam-ining the jurisprudence of financial sector regulation. The jurisprudential analy-sis covers the concept of financial sector regulation, the objectives of regulation,the design of a regulatory framework, models of financial sector regulation inEurope and other parts of the world, and the constituent elements of a sound reg-ulatory framework.

Building on Chapter 1, Chapter 2 examines the concept of an independent reg-ulator as a corollary to an efficient and effective framework for financial servicessupervision. The thesis is advanced that, although the concept of an independentregulator provides incentives for regulators and supervisors to do quality work,the independence of a regulator may not necessarily prevent the occurrence of afinancial crisis. The crux of the matter, it is argued, lies in recognizing thatachieving both political independence and independence from the industry regu-lated is as important as ensuring that the independent regulator is accountable.

After Chapter 3 introduces the concept of a unified financial services regula-tor, explaining the difference between a partially and a fully unified regulator andfleshing out the obstacles and challenges different countries have faced in imple-menting models of unified financial services regulation. It then examines issuesand themes in the contemporary debate on unified financial services supervision.Chapter 4 places that discussion in context by examining models of unifiedfinancial services regulators in Latvia, Norway, Denmark, Sweden, and theUnited Kingdom. However, before examining the regulatory environment inthese countries, it is important to first understand that the financial servicesindustry to be regulated is diverse. Therefore, the structure of the regulatory and

Designing a Sound Regulatory Framework for Financial Services Supervision 3

institutional framework in every country will depend in part on the objectives ofregulation and the size of the financial sector. Further, the type of risk control sys-tems in place and the effectiveness of these systems can affect the structure of theregulatory and institutional framework. As the International Compliance Associ-ation observes:

[The financial services industry] operates on numerous different levels andcan be divided and subdivided in various ways. Different countries have theirown financial services industries, which are comprised of different marketsectors, providing various forms of service in relation to different forms ofproduct. Even though economic liberalisation during the twentieth centuryhas caused an unprecedented level of cohesion amongst these nationalfinancial systems—to the extent that there now exists a single global finan-cial marketplace—that marketplace is still diverse. By definition, the spe-cific manner in which an international, regional, national, or market sectorregulatory authority regulates depends on a variety of factors.3

Though there is admittedly no unified theory of financial services regulation,the following comprise some broad objectives for regulation:4

• Protecting investors to help build their confidence in the market• Ensuring that the markets are fair, efficient, and transparent• Reducing systemic risk• Protecting financial services businesses from malpractice by some con-

sumers (such as money laundering)• Maintaining consumer confidence in the financial system.

Where the regulatory framework effectively controls market abuses, such asunlawful and unauthorized disclosures, insider dealing, and money laundering,prospects for building investor and consumer confidence in the market are high.Investors tend to target markets that protect them against such risks. And whenfinancial intermediaries, market players, and institutional investors are well reg-ulated, through means such as effective Chinese walls and clear codes of conduct,financial services businesses are likely to feel protected against fraudulentactivity by consumers. Taken together with the efficient regulation of informationdisclosure, such efforts can lead to a more fair, efficient, and transparent market.

3 See International Compliance Association, International Diploma in Compliance—Manual 1 (International Compliance Association 2003). 4 See id. at 1–2. See also D. T. Llewellyn, Institutional Structure of Financial Regulationand Supervision: The Basic Issues, in Aligning Financial Supervisory Structures withCountry Needs 36–37 (J. Carmichael, A. Fleming & D. Llewellyn eds., World BankInstitute 2004).


Systemic risk can be mitigated through efficient regulation of information andthrough the use of Chinese walls to fight contagion when certain parts of themarket collapse. It is also important to ensure that legal rules are enforced so asto promote and maintain consumer confidence in the financial system. Ruleswithout enforcement are like a tiger without teeth.

In general, the development of financial services regulation in many countrieshas followed a historic pattern. Among the factors that affect the pattern are pub-lic policy, the structure of the existing legal framework (including the national con-stitution, as in the case of Canada5), the impact of international best practices onvarious aspects of financial regulation, movements toward regional integration, agovernment’s response to financial scandals (such as the collapse of Barings andBCCI in the United Kingdom, and the collapse of Enron in the United States),pressure from the international community, and market pressure in general.

One key objective of regulation is to redress the information imbalance thatsometimes exists between consumers and financial services businesses in favorof consumers. This is usually done by imposing upon financial services busi-nesses minimum standards of business conduct. Moreover, the fairness of thefinancial markets depends in part on the degree of consumer protection. Overall,regulation attempts to strike a balance, protecting the marketplace from itselfwithout stifling legitimate risk-taking.6 One method is to prevent business fail-ures by imposing capital and internal control requirements. These requirementsensure that business entities have sufficient liquidity to meet their obligations,making them less vulnerable to hasty withdrawals by depositors and investors andto other market shocks.7

A number of countries have focused first on the regulation of banking (morespecifically, deposit-taking activity) and investment (securities) businesses.8 Morerecently, regulation has been introduced to control the conduct of trust and com-pany services providers9 and to curb financial crimes, such as money-laundering.10

A legitimate question in all these cases is: What do we mean by “regulation”?

5 On the Constitution-related argument regarding the structure of the regulatory frame-work for financial services supervision in Canada, see generally the following publica-tions: International Developments Part I, supra n. 1; International Developments Part II,supra n. 1; and P. Kyle, Making Regulatory Structures Effective: Establishing Legal Con-sistency for Integrated Regulation, in J. Carmichael et al., eds., id. at 211–14. 6 International Compliance Association, supra n. 3, at 4.7 See id. at 4.8 See id. at 5. 9 See id.10 See generally International Compliance Association, International Diploma in Anti-Moneylaundering–Manual (International Compliance Association 2003).


1.2 “Regulation” Defined

The term regulation refers to a set of binding rules issued by a private or publicbody.11 Generally, these can be defined as those rules that are applied by all reg-ulators in the fulfillment of their functions; in the financial services area, theyinclude such prudential rules as those influencing the conditions of access to themarket (intended to prevent the emergence of entities with doubtful reputation orwithout financial capacity necessary for the operations they intend to implement)and those aimed at controlling the risks associated with financial activities, cor-porate governance and internal control systems, conduct-of-business rules, andmethods of supervision.12 The body issuing these rules must be given the author-ity to do so.

Although some commentators, such as the International Compliance Associ-ation (ICA), have argued that the body issuing regulations should also haveboth the authority to supervise compliance with the rules and the power to issuesanctions against breach of the rules,13 experience in many countries has shownthat this is not always the case. There are situations where the power to issue reg-ulations reposes in a different body from that handling sanctions for breach ofregulations.

Also, the role of a regulator should not be confused with the role of a supervi-sor. Whereas a regulator is concerned mainly with preparing and issuing regula-tions and promoting a culture of compliance with these regulations, a supervisor,by contrast, may undertake on-site and off-site supervision of financial servicesbusinesses. In some jurisdictions, such as the UK, however, the powers to regu-late and to supervise the activities of financial services businesses both reside inthe same body.

The regulatory framework for financial services is often comprised of a combi-nation of two or more of the following: (a) primary enabling legislation; (b) second-ary legislation issued pursuant to the enabling statute; (c) principles, rules, and codesissued by regulators; and (d) guidance or policy directives issued by the regulatoryauthority. In some jurisdictions, primary legislation provides that “guidelines”should be treated as law.14 In civil law countries, the civil code, which is the blood-line of private property rights in most civil law jurisdictions, can be equated to a con-stitution for the protection of private commercial and contractual rights of citizens.Though common law jurisdictions do not have the equivalent of a civil code, theycan import and apply principles of the common law and doctrines of equity.

11 International Compliance Association, supra n. 3, at 1.12 See id. at 46–48.13 See id. at 1.14 See id. at 22.


1.3 Designing a Framework for FinancialServices Supervision

When a regulatory framework is designed, it is important that the drafters under-stand, first, the size and structure of a particular industry and, second, the role ofa regulator in that country. In most jurisdictions, enormous power is bestowedupon regulators to authorize the commencement and cessation of businesses.15

Regulators usually also have the power to make judgments about the conduct ofindividuals, which can have a profound impact on the ability of those individualsto work in the regulated sector.16

Invariably, the structure and objectives supporting the regulatory frameworkdiffer from one jurisdiction to another. In the U.S., for example, there are a mul-titude of agencies, at both the state and federal levels, that have separate yet some-times duplicative regulatory authority over the financial services industry.17 Thishigh level of duplication is caused by a combination of functional and institu-tional regulation.18 As one report for the United States shows:

In the banking sector, for example, there are four regulators: (1) the Office ofthe Comptroller of the Currency; (2) the Federal Deposit InsuranceCorporation; (3) the State Regulator; and (4) the Federal Reserve. In thesecurities arena, there is the Securities and Exchange Commission (SEC)and the Commodity Futures Trading Commission (CFTC). The securitiesbusiness of investment banks is partly overseen by the SEC and partly bythe Federal Reserve. There are different state regulators responsible for theconduct of the insurance business.19

Turning to other countries, the report notes that even in jurisdictions such asthe UK or common law “offshore” jurisdictions where there is no hierarchy ofdifferent regulatory authorities, the environment is complex.20 For instance,

15 See id. at 39.16 See id.17 See id. See also S. A. Ramirez, Depoliticizing Financial Regulation, 41(2) Wm. & MaryL. Rev. (2000), http://classes.washburnlaw.edu/rami/publications/depoliticizing.htm(accessed June 28, 2004). 18 On the functional and institutional models of financial regulation, see generally below,pp. 11–12. 19 International Compliance Association, supra n. 3, at 16.20 See id. at 39–40.


regulators may fulfill the following functions:

• Lay down rules or principles that determine who can conduct a financialservices business.

• Authorize financial services businesses to operate.• Lay down rules for how those operating in the regulated industry must con-

duct their business (both prudential and conduct-of-business rules).• Supervise compliance with the rules through desk-based supervision,

onsite inspections, or a mixture of the two.• Enforce the rules.• Investigate suspected breaches of the rules, sometimes in conjunction with

other law enforcement bodies.• Cooperate and exchange information with other regulators.21

In some jurisdictions with less-developed regulatory regimes, regulators havebeen given a business development role.22 However, this practice has beenfrowned upon by such groups as the International Monetary Fund (IMF) and theFinancial Action Task Force (FATF) and those jurisdictions are moving awayfrom the practice.23

There are a variety of models of financial services regulation throughout theworld.24 For example, in Hong Kong, while the Hong Kong Monetary Authorityis in charge of the currency board and supervises banks, the Insurance Commis-sioner supervises insurance businesses,25 the Securities and Futures Commission(SFC) supervises the securities and futures markets, and a Mandatory ProvidentFund Authority oversees mandatory retirement funds.26 By contrast, in mostEuropean Union (EU) countries, the central banks are responsible for bankingsupervision, although in Austria, Germany, Luxembourg, and Finland, this task is

21 See id.22 See id.23 See id.24 See, for example, the conference papers collected in Challenges for the Unified Finan-cial Supervision in the New Millennium (The World Bank & the Ministry of Finance ofEstonia 2001). 25 See International Monetary Fund, Experimental IMF Report on Observance ofStandards and Codes: People’s Republic of China—Hong Kong Special AdministrativeRegion, http://www.imf.org/external/np/rosc/hkg/#V (accessed June 28, 2004). See alsothe website of the Hong Kong Monetary Authority, http://www.info.gov.hk/hkma/eng/hkma/index.htm (accessed June 28, 2004).26 International Compliance Association, supra n. 3, at 17.


assigned to a separate agency.27 Table 1.1 illustrates the current structure ofsupervision in a number of EU countries.

Other common models of financial services regulation are regulation byobjectives, functional regulation, institutional regulation (regulation by silos),and a single regulator.28 In a system that subscribes to regulation by objectives,the regulatory model “seeks to achieve certain explicit objectives by givingresponsibility for one or more of them to specific regulatory bodies that existsolely for that purpose.”29 Examples of this model are a central authority that is

27 See id. at 18.28 See id. at 40. See D. T. Llewellyn, supra n. 4, at 40–50.29 International Compliance Association, supra n. 3, at 40.

TABLE 1.1

Financial Services Supervisory Models in the European Union

Country Banking Securities Insurance

Belgium BS BS I

Denmark U U U

Germany B B, S I

Greece CB S I

Ireland CB CB G

Italy CB CB, S I

Luxembourg BS BS I

France B, CB B, S I

Spain CB S I

Netherlands CB CB, S I

Portugal CB CB, S I

Austria G G G

Finland BS BS I

Sweden U U U

United Kingdom U U U

Explanatory notes: CB = Central bank; BS = Banking and securities supervisor; B = Banking supervisor; S = Securities supervisor; I = Insurance supervisor; G = Government department; and U = Single financial supervisor.

Source: International Compliance Association, International Diploma in Compliance—Manual (International Compliance Association, 2003).


empowered to conduct prudential regulation, a central authority responsible forsupervising and passing regulations for the conduct of business, a central bankresponsible for monetary policy, and a central authority responsible for regulat-ing competition.30

In a system that pursues functional regulation,31 there is a general view that itis more important to regulate the functions performed by financial services busi-nesses than the types of businesses that undertake them.32 This approach requiresrules pertaining to function to be applied consistently to any business that dis-charges them, irrespective of the type of business.33 Examples of functionalactivity that can be regulated across all sectors include client assets and all con-duct-of-business issues. Australia, for instance, has a “twin peaks” regulatorymodel that adopts a functional regulation approach:34

(1) The Australian Securities and Investment Commission (ASIC) looks aftermarket regulation and consumer protection (referred to as “market con-duct regulation”). ASIC is also responsible for financial sector consumerprotection.35

(2) The Australian Prudential Regulatory Authority (APRA) is responsiblefor prudential regulation.

Meanwhile, the Reserve Bank of Australia looks after monetary policy and sys-temic stability.

Clearly, there is no simple panacea for a government or country in its choiceof a regulatory model. Various country-specific factors, including the policyobjectives underpinning the choice of a regulatory model, the development andsophistication of the financial sector, and groups of companies that are closelyinterconnected, thus posing a greater threat of systemic risk and contagion, caninfluence the choice of a particular regulatory model.

In general, the idea of institutional regulation, unlike that of functionalregulation, relates to the regulation of each single category of financial services

30 See id. at 40–41.31 Functional regulation is sometimes referred to as “regulation by activity.”32 International Compliance Association, supra n. 3, at 41.33 See id. at 41.34 See id.35 See id. at 41 and 17. See also The Hon. Peter Costello, MP, Treasurer of the Common-wealth of Australia, Treasurer Address to CCH Forum, Australia’s Financial ServicesReform Agenda (Sydney, July 17, 2003), http://www.treasurer.gov.au/tsr/content/speeches/2003/009.asp (accessed June 28, 2004).


business by a different authority, agency, or agency division.36 This model issometimes referred to as “regulation by silos” or “the by-markets regulatorymodel.” According to one commentator, the distinction between functional andinstitutional regulation is one of the jurisprudential bases for the choice of regu-lation; the concept of a unified regulator is almost the antithesis of institutionalregulation.37

While this view may hold water, it is not immediately clear that the choice offunctional over institutional regulation, or vice versa, reflects the raison d’être—the philosophical foundation—for why a country should or should not introduceunified financial services supervision. From much of the data gathered in a sem-inal study on unified financial services supervision, covering countries as variedas Iceland, Hungary, Canada, Denmark, Norway, Sweden, Poland, Bulgaria, and theUnited Kingdom, it was observed that, in many cases, models of unified finan-cial services supervision started out along the lines of institutional before gradu-ating into functional regulation.38 In short, this is not a simple choice betweeninstitutional regulation and functional regulation. Nor are the two entirelyopposed. They can complement one another, providing a country with mixed andrational attributes of both institutional and functional regulation, or one systemcan run as a precursor to the other.

A major difference between functional and institutional regulation is that theformer emphasizes the setting up of departments in a supervisory agency thatdeal with such nonsectoral functions as licensing, legal, accounting, enforce-ment, and information technology, irrespective of the type of business activitybeing regulated. By contrast, a silo or institutional regulatory model encouragesorganization into departments that deal separately with all aspects of specifictypes of business activities. For example, the silo model could separately addressbanking, insurance, pension funds, and trading in securities, while the functionalmodel would concern itself mainly with finding out whether the issue to be dealtwith is one of licensing or any other regulatory norm, irrespective of the type ofbusiness activity.

A single regulator, commonly referred to as a “unified” regulator,39 is anothermodel of financial services regulation. There is, again, no single right way of

36 International Compliance Association, supra n. 3, at 41.37 E-mail from Nagavalli Annamalai, Lead Counsel, Private Sector, Finance and Infra-structure Development Group (LEGPS), The World Bank, to the author (March 31, 2005)(copy on file with the author). 38 See generally, International Developments Parts I and II, supra n. 1; K. K. Mwenda,supra n. 1.39 See id.


structuring a unified regulator. Some have jurisdiction, as a single centralauthority, to regulate different institutions and functions and monitor fulfill-ment of all regulatory objectives.40 Some deal solely with the securities andinsurance industries, or solely with pension funds and insurance companies. Inthe UK, for example, the Financial Services Authority (FSA) has taken overthe supervisory and regulatory roles previously carried out by some self-regulatory organizations (SROs) and statutory boards, such as the Securities andInvestment Board, the Investment Management Regulatory Authority, the Secu-rities and Futures Authority, the Personal Investment Authority, the FriendlySocieties Commission, the Registry of Friendly Societies, the Insurance Direc-torate of the Department of Trade and Industry, the Building Societies Commis-sion, Lloyds of London, the UK Listing Authority, and the Supervision andSurveillance Department of the Bank of England.41 Indeed, the supervisory andregulatory mandate of FSA covers a whole range of banking, insurance, securi-ties, and mutual fund activities.42 Further, the FSA is responsible for promot-ing and protecting consumer interests,43 and it cooperates closely and exchangesinformation with the Bank of England and the Treasury: A memorandum ofunderstanding, published in 1997, provides a framework for coordinationof FSA, Bank of England, and Treasury functions. Similar memoranda ofunderstanding have been executed in other countries, such as Hungary and Zambia.44

In the final analysis, for any country the choice of regulatory model dependson a variety of factors, some of which, as we saw earlier, are country-specific.Among these factors may be the historical development of the financial servicesindustry as well as such factors already alluded to as public policy priorities andgovernment efforts to move toward regional integration. With this in mind, wenow examine the concepts of a principles-based system of regulation and ofrules-based regulation.

40 See International Compliance Association, supra n. 3, at 41.41 See id. at 17.42 See id.43 See id.44 See K. K. Mwenda, Unified Financial Services Regulation: The Unfolding Debate, 1(2)CHIMERA J. 25–30 (2003), http://www.usaafrica.org/Chimera-Summer03.html(accessed January 2, 2005); and K. K. Mwenda & A Fleming, Developments in UnifiedFinancial Services Supervision: An International and Comparative Perspective, in Chal-lenges for the Unified Financial Services Supervision in the New Millennium, supra n. 24at 172–77.


1.3.1 Principles-based or Rules-based Regulation?

The design of a regulatory framework for financial services can be motivated bythe need to introduce either principles- or rules-based regulation; the differencecan be summarized as follows:

A principles-based system, which is common to most offshore financialcentres, is one in which regulators simply issue a set of principles withwhich regulated businesses must comply. They are generally supplementedby broad codes. In a rules-based system (for example, the UK), regulatorybodies also impose principles of regulation and supplement them withdetailed “rules” with which regulated businesses must abide in the fulfil-ment of those principles.45

In both cases, financial and human capital resources should be made available tosupport the design and implementation of an efficient regulatory framework. Also,there is need to galvanize the necessary political will among different stakeholders.

Further, where a regulator, unified or not, is housed (such as in the centralbank or elsewhere) is another issue the country must decide, weighing its choiceagainst the resources it has and against the policy objectives underpinningthe introduction of the new regulatory framework. Some regulatory bodies havestarted off by piggybacking on the central bank or the Ministry of Finance foroffice accommodation, or began as a department of the central bank or the Min-istry. Others have from the very beginning been organized and housed separately.Among the factors affecting the decision may be organizational politics, limitedfinancial resources, insufficient numbers of appropriately qualified personnel,difficulties in identifying or financing the acquisition of offices to accommodatethe regulator, and the stakeholder interests of an institution such as the centralbank in the new regulatory body.

1.4 General Statutory Powers of a Regulatory Body

Most effective regulatory bodies, whatever the jurisdiction in which they operate,have clear responsibilities and objectives, adequate powers, adequate resources,transparency, and accountability.46 Generally, the responsibilities and objectivesof such a body depend in part on the regulatory model in place and the role theregulator has been established to fulfill.47 It has been argued, for example, that a

45 See International Compliance Association, supra n. 3, at 41.46 See id. at 49.47 See id.


regulator must have sufficient legal powers to make regulation effective, such asthe power to

• authorize businesses to conduct regulated activities;• supervise regulated businesses;• inspect, investigate, and enforce compliance with legal and regulatory

requirements, either through imposition of license requirements or with-drawal of authorization; and

• share information with other regulators.

To facilitate application of these powers, the law should also provide the reg-ulator with protection against any liability that may arise from the proper dis-charge of its powers. In many countries, primary legislation protects regulatorsfrom liability arising out of the exercise of any of their powers unless the regula-tors exercise those powers in bad faith.48 The protection of regulators is impor-tant; it gives them an incentive to perform diligently, competently, independently,and professionally, without fear that they will be sued by an aggrieved party, evenif they had acted in good faith, for torts such as negligence or trespass.

A common criticism by international evaluators is that many regulators lackthe resources they need to fulfill their functions.49 Lack of resources can com-promise a regulator’s independence if the regulator is heavily reliant on the stateto fund its operations. For instance, in many countries, bank supervisors receivebetter remuneration and perquisites than, say, insurance supervisors, securitiesregulators, or pension fund supervisors. Such a disparity can create tensionswhen the different supervisors are all brought under one roof. Bank supervisorswould want to maintain their compensation, while their counterparts in the non-banking financial sectors would want to be raised to the bank supervisors’ finan-cial level. Questions may well surface as to whether the salaries of all supervisorsshould be harmonized across the unified agency based on qualifications, workexperience, or the industry supervised. If this matter is not handled properly, theunified agency risks losing well-qualified staff to the private sector. The privatesector is likely to pay these individuals better than the regulator, although the reg-ulator may have invested heavily in training these individuals.

Another area where some regulators face resource constraints relates to aninability to hire well-qualified people to perform certain supervisory tasks. Thelack of appropriately qualified human capital is a notable constraint on regulatoryagencies, especially in developing countries and emerging economies. Equally

48 See id. at 50.49 See id.


important as the human resource constraint is the lack of suitable infrastructureand technology to process information in a timely and reliable manner. Again,many regulatory agencies in developing countries and emerging economies areconfronted by this problem.

In general, the issue of how independent a regulator should be has generatedconsiderable debate on the disadvantages and advantages of the very concept ofan independent regulator. A common view, however, is that a regulator should beoperationally independent and accountable for the use of its powers.50 The fol-lowing indicators are characteristic of a regulator with accountability: operationsthat are independent of political and commercial interests and that are transpar-ent; the right of appeal of the regulator’s decisions; and access to judicial reviewof the regulator’s decisions.51 Regulatory bodies often seek to achieve trans-parency and accountability by imposing both internal and external safeguards.52

1.4.1 Authorization to Conduct a FinancialServices Business

Generally, the power to authorize an individual or business entity to conduct afinancial services business is vested in the regulator,53 and only when authoriza-tion is granted, usually in the form of an operating license, may an organizationproceed to undertake the activity it is authorized to conduct. In many jurisdic-tions, undertaking regulated business activity without the necessary authoriza-tion is a criminal offense.54 In deciding whether to authorize a financial servicesbusiness, regulators tend to assess the following aspects of a business:

• Fitness of the organizers (honesty, integrity, reputation, competence, abilityand organization, and financial position)

• Scope of the business and business profile and plan (strategy and manage-ment responsibilities)

• Compliance procedures and activities (staff training, operating procedures,in-house rules, monitoring, handling of customer complaints, and notifica-tion requirements)

50 See id.51 See id.52 See id.53 See id. at 42.54 See K. K. Mwenda, Legal Aspects of Corporate Finance: The Case for an EmergingStock Market, unpublished Ph.D. thesis 270–82 (University of Warwick 1998); and K. K.Mwenda, Zambia’s Stock Exchange and Privatisation Programme: Corporate FinanceLaw in Emerging Markets 192–218 (Edwin Mellen Press 2001).


• Management (qualifications and experience, independence of risk andcontrol management, conflicts of interest, reporting and managementinformation)

• Resources (financial, human, and information technology resources; train-ing; compliance; front and back office organization).55

Where the proposed owner or parent organization of a financial services busi-ness is a foreign financial institution, it is usually prudent, as a prerequisite toauthorization, to consult with the agency responsible for supervision of the entityin its home country. The host regulator should seek confirmation from the homeregulator that the branch or subsidiary is subject to consolidated supervision anda decision should be made about who is the lead regulator for the organization.In many jurisdictions, regulators have signed memoranda of understanding bothwith other regulators within their jurisdictions and with regulators in foreignjurisdictions. These memoranda are useful in facilitating the sharing of informa-tion between regulators as they investigate financial services businesses engagedin crossborder and multisector transactions. Common terms in such memorandaare clauses dealing with the scope of assistance, the necessary forms of requestfor assistance, permissible uses of information, and confidentiality.56

1.4.2 Supervision of Financial Services Businesses

Some regulators have statutory powers only to issue regulations and to ensure,through oversight, that they are complied with. Other supervisory powers are leftto other bodies. In this section, however, we proceed on the assumption that theregulator has powers to both issue regulations and supervise financial servicesbusinesses.

In general, the elements of the process of regulation are as follows:

(a) Defining the objectives;(b) Obtaining information from regulated businesses;(c) Assessing the risk that regulated businesses pose; and (d) Taking action in response to the risk assessment.57

Given that no business is without risk, many regulators adopt a risk-basedapproach to supervision,58 ensuring that the various types of risk associated with

55 See International Compliance Association, supra n. 3, at 42–43.56 See id. at 52.57 See id. at 43.58 See id.


a particular financial services industry or business are identified, quantified,managed, and monitored properly.

1.4.3 Enforcement of Regulations

Many countries today consider enforcement of the rules for the financial servicesindustry to be part of the function of a regulator. It has been argued, for example,that:

Enforcement is a necessary product of the process of authorisation andsupervision, in the sense that a regulator must enforce compliance withrules. A broad range of enforcement action exists, not all of which neces-sarily results in the imposition of regulatory penalties upon a business. It is,for example, perfectly normal for a regulator to commence enforcementaction by conducting an investigation which may lead to vindication of abusiness and its employees. Thus enforcement is as much about investigat-ing, gathering and sharing information as it is about imposing penalties.59

Requiring a regulator to enforce rules entails giving the regulator responsibil-ity for carrying out inspections, investigations, and surveillance, and imposingremedial action and penalties.60 In jurisdictions where this occurs, regulators nor-mally have powers to request information, impose sanctions, seek orders fromcourts or other tribunals, refer matters for criminal prosecution, and suspendbusiness operations or trading.61 International standard-setting bodies have beenpromoting the importance of domestic regulators having adequate enforcementpowers.62

1.5 Conclusion

This chapter has examined critical issues relating to establishment of a sound reg-ulatory and institutional framework for the supervision of financial services. Thechapter examined, inter alia, the objectives of financial services regulation, dif-ferent models of financial services regulation, and the different roles of financialservices regulators, and identified essential elements of a sound framework forthe supervision of financial services. It was also pointed out that there is nounified theory of financial services regulation. The chapter fleshed out some of

59 See id. at 45.60 See id.61 See id.62 See id.


the common conceptual and practical issues that arise in setting up a sound reg-ulatory and institutional framework for financial services supervision, empha-sizing the diversity of the financial services industry. It was concluded that thestructure of the regulatory and institutional framework in every country willdepend in part on the objectives of regulation and the size of the financial sector,and that the type of risk control systems in place and their effectiveness can affectthe regulatory and institutional structure.




by Kishor Uprety










Publishers, Moscow








19

C H A P T E R 2

Promoting the Independence of a FinancialServices Regulator

2.1 Introduction

The preceding chapter examined the historical development of unified financialservices supervision. While Chapter 3 considers the concept of a unified financialservices regulator by looking at approaches taken in a variety of countries, thischapter examines the idea of promoting the independence of a financial servicesregulator as a corollary to designing an efficient and effective national frameworkfor financial services supervision. It asks such questions as: Should law reformprofessionals, policy makers, and institutions concerned with creating legalframeworks for financial services supervision bother about imbuing in the law theconcept of an independent regulator? What are the key features or themes to con-sider when promoting the independence of a financial services regulator?

This chapter examines, inter alia, the conceptual, theoretical, and practicaladvantages of a country having an independent regulator rather than a regulatorwhose independence is compromised by such factors as political interferencefrom the government. It discusses economic, jurisprudential, and policy consid-erations underpinning a sound regulatory and institutional framework for finan-cial services supervision. It is argued that, although independence providesincentives for regulators to improve the quality of their supervision, it may notnecessarily prevent the occurrence of a financial crisis. The cardinal point, itavers, is that both political independence and independence from the industryregulated are as important as ensuring that the independent regulator isaccountable.

2.2 Independence and the FinancialServices Regulator

The concept of independent regulation has come to be associated more with theservice sector than with the goods sector.63 Examining the idea of central bankindependence, Nobel Laureate Joseph Stiglitz, former Chief Economist of the

63 See P. S. Mehta, Why a Steel Regulator Makes Little Sense, Business Line (Decem-ber 17, 2004), http://cuts-international.org/articles2004.htm (accessed January 3, 2005).


World Bank, puts it succinctly:

An independent central bank focused exclusively on price stability hasbecome a central part of the mantra of “economic reform.” Like so manyother policy maxims, it has been repeated often enough that it has come tobe believed. But bold assertions, even from central bankers, are no substi-tute for research and analysis.

Research suggests that if central banks focus on inflation, they do a betterjob at controlling inflation. But controlling inflation is not an end in itself:it is merely a means of achieving faster, more stable growth, with lowerunemployment.

These are the real variables that matter, and there is little evidence that inde-pendent central banks focusing exclusively on price stability do better inthese crucial respects. . . .

The economic analysis of Clinton’s Council of Economic Advisers turnedout to be right; the models of the IMF (and the Fed) were wrong.64

While the term “independence,” in its ordinary meaning, could entail the ideaof not being influenced or controlled by others, the independence of any regula-tory agency can be viewed from four related angles: regulatory, supervisory,institutional, and budgetary.65 Regulatory independence in the financial sectormeans that regulators have wide autonomy in setting, at a minimum, prudentialregulations that follow from the special nature of financial intermediation.66

These regulations concern practices that financial institutions must adopt tomaintain their safety and stability, including minimum capital adequacy ratios,exposure limits, and loan provisioning.67 It has been argued that regulators whoare able to set these rules independently are more likely to be motivated toenforce them.68 But is the fact that the regulators and supervising financial serv-ices business are independent an end in itself, or should these regulators also becommitted to transparency and accountability?

We will examine these issues in greater detail in the next section. Here, sufficeit to say that, while the independence of a regulator can at times be achieved by

64 J. Stiglitz, Big Lies About Central Banking, Project Syndicate, http://www.project-syndicate.org/commentaries/commentary_text.php4?id=1232&m&setcookie=1 (accessed January 3, 2005).65 M. Quintyn & M. W. Taylor, Should Financial Sector Regulators Be Independent? 34Economic Issues 6 (IMF 2004).66 See id. at 6–7.67 See id. at 7.68 See id.

Promoting the Independence of a Financial Services Regulator 21

giving the regulator legal and operational autonomy, or financial autonomy, orby establishing procedures for the independent appointment and dismissal of reg-ulators, or even through the composition of the regulatory agency itself, confi-dence in the quality of oversight can be compromised where the regulator’s inde-pendence is challenged or threatened. Close relationships between regulators andthe institutions and individuals they regulate are often a cause of concern.

Although supervisory independence is crucial to the financial sector, it mayprove difficult to establish and guarantee, since supervisors often work closelywith financial institutions not only in inspecting and monitoring them but also inenforcing sanctions and even revoking licenses. Further, because much supervi-sory activity takes place outside direct public view, interference, either by politi-cians or by industry, can be subtle, taking many forms.69 Thus,

Steps to protect supervisors’ integrity include offering legal protection (forexample, repealing laws that, in some countries, allow supervisors to besued personally for their work) and providing financial incentives thatallow supervisory agencies to attract and keep competent staff anddiscourage bribery. Crafting a rules-based system of sanctions and inter-ventions also lessens the scope for supervisory discretion—and thus forpolitical or industry interference. To protect supervisors from political orindustry intimidation during a lengthy court process, banking law shouldalso limit the time allowed for appeals by institutions facing sanctions.Independent supervisors, not a government agency or minister, should begiven sole authority to grant and withdraw licenses because they bestunderstand the financial sector’s proper composition—and because thethreat to revoke a license is a powerful supervisory tool.70

Closely related to the idea of the supervisory independence of a regulator is thatof institutional independence and the agency’s status outside the executive and leg-islative branches of government.71 There are several ways in which the institu-tional and supervisory independence of a regulator can be assessed. For example,where there is a high turnover of senior executives of a regulatory agency, wherethere appears to be poor exercise of discretionary powers, where there is evidenceof abuse of regulatory forbearance, where a regulator seems increasingly to be act-ing under external pressures and limitations, or where a regulator, in spite of beingwell endowed with resources, is failing to exercise its powers effectively, theindependence of that regulator is questionable. Also, a regulator that cannot setlicensing fees for market participants or execute any of its enforcement functions

69 See id.70 See id.71 See id. at 8.

has insufficient independence. Here, it is important to stress that the independencegives the regulator incentives to adopt best practices of corporate governance andaccountability. Where corporate governance and accountability appear to be poorthat raises concerns about the independence of the regulator.

Taking the banking sector as an example, a central bank that is too susceptibleto political direction or pressure can end up exacerbating economic cycles(“boom and bust”), because politicians are likely to be tempted to boost the econ-omy in advance of an election, to the detriment of the long-term health of theeconomy. Ideally, an independent central bank can run a more credible monetarypolicy, making market expectations more responsive to signals from the centralbank. The issue of central bank independence has been examined in greater detailelsewhere.72 Here, the salient features of the discussion will be highlighted.

2.3 The Example of Central Bank Independence

While the worldwide trend toward central bank independence73 has its roots in anumber of factors, the most fundamental was a challenge to economic orthodoxythat occurred in the 1970s.74 Taylor argues that the original nationalization of theBank of England had taken place within a policy context that seemed to acceptthe need for governments deliberately to stimulate demand in the economy toensure constant high levels of output and employment.75

This policy was largely inspired by the economic theories of John MaynardKeynes, and hence became known as the Keynesian demand manage-


72 K. K. Mwenda, Banking Supervision and Systemic Bank Restructuring: An Interna-tional and Comparative Legal Perspective 103–107 (Cavendish Publishing 2000).73 For further readings on this topic, see generally A. Alesina & R. Gatti, Independent Cen-tral Banks: Low Inflation at No Costs, 85 Am. Econ. Rev., Papers and Proceedings 196–200(1995); C. Bean, The New UK Monetary Arrangement: A View from the Literature, 108Econ. J. 1795–1809 (1998); R. M. W. J. Beetsma & A. L. Bovenberg, Central Bank Inde-pendence and Public Debt Policy, 12 J. Econ. Dynamics & Control 873–894 (1997); A. P.Blake & M. Weale, Costs of Separating Budgetary Policy from Control of Inflation: ANeglected Aspect of Central Bank Independence, 50 Oxford Econ. Papers 449–467 (1998);C. B. Briault, A. G. Haldane & M. A. King, Independence and Accountability, 49 Bank ofEngland Working Paper (1996); G. Debelle, Central Bank Independence: A Free Lunch?IMF Working Paper, No. 96/1 (1996); G. Debelle & S. Fischer, How Independent Should aCentral Bank Be? in Goals, Guidelines, and Constraints Facing Monetary Policy Makers,Federal Reserve Bank of Boston Conference Series, No. 38 (J. C. Fuhrer ed., 1994);A. Posen, Central Bank Independence and Disinflationary Credibility: A Missing Link, 50Oxford Econ. Papers 335–59 (1998); and L. E. O. Svensson, Inflation Targeting: Imple-menting and Monitoring Inflation Targets, 41 Eur. Econ. Rev. 1111–46 (1997).74 M. Taylor, Central Bank Independence: The Policy Background, in M. Blair,R. Cranston, C. Ryan & M. Taylor, Blackstone’s Guide to the Bank of England Act 199810 (Blackstone Press Limited 1998).75 See id. at 11.


ment. . . . In the first few decades of the post-war era governments soughtto use their power to tax, borrow and spend (“fiscal policy”) to ensure thatunemployment stayed low. Inflation was not seen as a serious threat, and amodest amount could be accepted as the price of protecting jobs. Thusmonetary policy was regarded as a subsidiary to fiscal policy as the mainlever for influencing the level of economic activity, and interest rates weredeliberately kept down to stimulate investment. In this environment it wasnatural to expect the central bank to play a subordinate role to government,and to follow policies which supported the broad policy objective of ensur-ing against the return to the mass unemployment of the 1930s.

This orthodoxy began to break down in the early 1970s. Governmentsthroughout the developed world were then faced by both rising unemploymentand rising inflation, something the Keynesian model of the economy failed topredict. The failure of demand-management policies permitted the emergenceof a new economic orthodoxy which stressed the importance of controllinginflation as the key to ensuring successful long-term economic performance.76

Some decades later, following a shift in October 1992 to inflation targeting bythe British government that was relatively successful for four and a half years, thegovernment granted operational independence to the Bank of England.77 Underthe new arrangement, the inflation target is set by the Chancellor of the Exche-quer in the annual budget; then the Monetary Policy Committee (MPC)—established following the decision to grant the bank independence and consistingof Bank of England staff members and outsiders—sets interest rates to achievethe inflation target.78 While the basic idea is not entirely new, inflation targetingis a rather significant step toward establishing a workable and well-definedframework for monetary policy.

A fundamental implication of central bank independence is the separation ofmonetary and fiscal policies, which has a virtually unavoidable impact on thepolicy mix.79 It is often argued that monetary policy is constrained by excessivegradualism, in the sense that decision making seeks to smooth interest rates rel-ative to some optimal rule.80 The IMF notes that the granting of operational inde-pendence to the Bank of England has made decision making more transparent,focused, and analytical.81 The significance of the fact that inflation targeting uses

76 See id. at 10–11.77 H. Samiei, J. K. Martijn, Z. Kontolemis & L. Bartolini, International Monetary Fund:United Kingdom. Selected Issues 4 (IMF 1999).78 See id. at 4.79 See id. at 17.80 See id. at 4.81 See id.

expected rather than actual inflation as an operational target (or as intermediatetarget) is seen in the following:

[The use of expected inflation] implies that factors, such as the output gapand fiscal policy, that play a role in the determination of future inflationshould in principle enter the decision-making process, as well as the expec-tations of their path and future interest rate decisions. For example, tightproduct and labor markets would be expected to raise inflation and, withinthe inflation targeting framework, generate a monetary policy responseeven before actual inflation rose. Given the estimated lags between mone-tary policy and inflation, such forward-looking behavior is necessary toachieve the target.82

Despite all the improvements to monetary policy in the UK, and also given theapparent success of targeting in controlling inflation, the new regime arguably didnot sufficiently protect against inflationary bias.83 The “government remained incontrol of the policy process, and no institutional safeguards existed against theuse of unsustainable politically motivated monetary policy decisions.”84 It was notuntil May 1997 that the UK government took measures to remedy this deficiencyby giving operational independence to the Bank of England.

The advantages of central bank independence vary from context to context.Some consider that central bank independence can increase the credibility ofmonetary policy by convincing private agents that the monetary authority has lit-tle incentive to create surprise inflation.85 Further, the mere granting of centralbank independence “would likely suffice to remove the distortion”86 in politicalbusiness cycles such as where the government in power, seeking to win an elec-tion, directs the central bank to finance part of the election campaign. On theother hand, there is a likelihood of encountering some shortcomings if centralbank independence is introduced without due consideration of its objective func-tion. The objective function is often driven by economic policies of a government.For example, where there is permanent inflation bias associated with time-inconsistent policies, given that surprise inflation would be the equilibriumoutcome, the mere introduction of central bank independence, without referenceto its objective function, would neither be a sufficient step nor a credible com-mitment to price stability.87 However, where a policy such as inflation targeting


82 See id. at 7.83 See id.84 See id.85 See id. at 10.86 See id.87 See id.


is combined with the operational independence of the central bank, as in theUnited Kingdom now, there is a suitable framework for a focused and crediblemonetary policy that is effective in reducing the inflationary bias in policymaking.88

2.4 Independent but Accountable

In many countries, policy makers and policy analysts are increasingly recogniz-ing the need to shield financial sector regulators from political pressure.89 Mea-sures to do so help to improve the quality of regulation, with the ultimate goal ofpreventing financial crises.90 It is not enough that the regulator that supervisesfinancial services is independent. To be efficient and effective, the independentregulator must also be transparent and accountable.91 For this reason, institutionalindependence has three critical elements:

1. Senior personnel should enjoy security of tenure (clear rules, ideallyinvolving two government bodies that govern their appointment and, espe-cially, dismissal, or a single body that is bound by legislation governingthe grounds for the appointment and dismissal of senior personnel, with apossibility provided to aggrieved parties to appeal against the dismissaldecisions).

2. The agency’s governance structure should incorporate multimember com-missions composed of experts.

3. Decision making should be transparent to a degree consistent with com-mercial confidentiality, enabling both the public and the industry to scruti-nize regulatory decisions.92

Budgetary independence, on the other hand, is said to depend primarily on therole of the executive or the legislative branch that determines the agency’s budgetand how it is used.93 This means that supervisors should not be subjected to

88 See id. at 21.89 See K. K. Mwenda, supra n. 72, at 104–107.90 M. Quintyn & M. W. Taylor, supra n. 65, at 1.91 For similar views, but focusing on prospects for setting up a unified financial servicesregulator in the Bahamas, see Nassau Guardian, The Rationale for a Single NationalFinancial Services Regulator: Is The Bahamas Ready for a Super Regulator?http://www.thenassauguardian.com/business/295537629381368.php# (March 9, 2004,accessed January 2, 2005).92 M. Quintyn & M. W. Taylor, supra n. 65, at 8.93 See id. at 8.

political pressure through the budget. Also, if funding of the regulatory agencymust come from the government budget, then the supervisory budget should beproposed and justified by the agency itself, following objective criteria related towhat is happening in the market.94

Some supervisory agencies are funded through industry fees. While it doesminimize political interference, this practice, it must be emphasized, risksincreasing dependence on—and interference from—the industry.95 Therefore, ifindustry fees are to be used to fund regulation, they should be determinedjointly by the regulatory agency and the government.96 Also, given that fee-based funding may leave the agency strapped for funds during a crisis, which isprecisely when businesses in the industry are most likely to have difficulty pay-ing the fee, regulatory agencies should be allowed to build up reserve funds asinsurance.97

In many countries, politicians define regulatory and supervisory goals in thesame way that they set a country’s targets for monetary policy, but it is the regu-lators, like the central bank as is customary in the case of monetary policy, thatdetermine how to achieve these goals. Thus, where regulators fail, they should beheld accountable, since they determine how to achieve regulatory goals.98 Butdoes the independence of the regulator necessarily guarantee the quality of regu-lation? And can the fact that a financial services regulator is seen as independentprevent a financial crisis?

In assessing the efficacy of the legal, regulatory, and institutional frameworksfor financial services supervision, among issues to consider that are fundamen-tal to an efficient and effective framework is the question of how independentfinancial services regulators are, or should be. Although independence may pro-vide an incentive for improving the quality of regulation, it may not necessarilyprevent a financial crisis. (The other structural, macro-, and microeconomicconditions that need to be taken into account are beyond the scope of thischapter.)

Before examining some of the arguments for and against the idea of an inde-pendent financial sector regulator, let us identify some of the questions tobe answered in assessing the efficacy of legal, regulatory, and institutional


94 See id.95 See id.96 See id.97 See id.98 See C. Proctor, Regulatory Immunity and Legal Risk, 7(3) Financial Regulator 27(2002). http://www.centralbanking.co.uk/publications/journals/pdf/FR_7_3_Proctor.pdf(accessed January 2, 2005).


frameworks for financial services supervision. They are closely related to theidea of how independent financial services regulators are or should be.

• Is the governance structure of the financial services regulator based onsound principles of corporate governance?99

• Within the legal and regulatory framework, is there a balance betweenthe concept of an independent regulator and that of accountability of theregulator?

• Who has powers to appoint and dismiss the Chief Executive Officer (CEO)of the financial services regulator?

• What are the minimum qualifications for appointment as CEO of a finan-cial services regulator?

• Is the CEO appointed by the Minister or the Head of State?• Alternatively, is the CEO appointed by Parliament? Does Parliament have

the legal authority to remove the CEO from office?• Are the grounds on which the CEO can be fired spelled out clearly in

the law?• Does the Minister or the Head of State have wide discretionary powers to

hire and fire the CEO?• Are decisions of the regulatory agency arrived at in a transparent manner,

though with due deference to the need for client confidentiality?• Who determines the salaries of the CEO and the directors of the regulator?• Does the Ministry of Finance or any other Government Ministry determine

the salaries and appoint the directors?• Who determines and funds the operational and administrative budget of the

regulator?• Are financial services regulators civil servants and who determines their

conditions of service? • Are these regulators immune from lawsuits for omissions or acts done in

good faith in the course of business?• When, and under what circumstances, can financial services regulators be

held liable for omissions or acts done in the course of business?• Does the Minister have powers to intervene in the functions of the regulator?• Does the legal framework address adequately the issue of disclosure of

information, and are there continuing disclosure obligations?• To what extent does the legal framework deal with matters such as unau-

thorized securities advertisements, misleading statements and misrepresen-tations, creation of a false market in securities, market abuse, and insiderdealing?

99 See D. T. Llewellyn, supra n. 4, at 30.

• What are the conditions for authorizing and licensing financial intermedi-aries? On what grounds can licenses be suspended or withdrawn?

• Does the legal framework provide for a compensation fund to protectinvestors, or for an ombudsman or a code of conduct to regulate financialintermediaries?

• Does the regulatory and institutional framework meet international stan-dards and best practices, such as the Basel Core Principles for EffectiveBanking Supervision or the Basel Accord II?100

• What are the legal requirements for listing securities, licensing banks,licensing securities firms, and licensing insurance and pension fundcompanies?

• What are the grounds upon which securities can be suspended from listingor de-listed?

• What are the grounds for de-licensing or deregistration of banks, securitiesfirms, insurance companies, and pension fund companies?

• Does the legal framework give regulators sweeping powers of regulatoryforbearance? Are such powers used arbitrarily and for political reasons?

The question whether an independent regulator can promote the quality ofregulation and supervision cannot be answered fully without examining a num-ber of the issues just raised. Equally important are other critical issues, such as:

• Is the country a civil law or a common law jurisdiction and what are theimplications of this?

• If a civil law system, does its Civil Code contain regulatory norms or rulesthat affect the legal, regulatory, and institutional framework for financialservices supervision?

• If a common law system, are there doctrines of equity that can be importedinto the legal and regulatory frameworks, and have these doctrines and theattendant fiduciary duties of financial intermediaries been codified?

• Should a financial services regulator cite central bank independence as abasis of its own independence? Would such an approach compromise theindependence of the financial services regulator where the regulator ishoused within the central bank and is likely to be drawing on its resources?

• What measures should be taken to ensure that a financial services regula-tor remains independent of the central bank?

A typical example of problems that can arise when a financial services regu-lator is too closely connected to the central bank can be seen in the case of


100 See generally, http://www.bis.org/.


Ireland. Debating the Central Bank and Financial Services Authority of IrelandBill 2002 before the Parliament of Ireland, a Mr. Naughten observed:

Section 27 of this Bill . . . provides that the Governor of the Central Bank mayissue guidelines to the regulatory authority. This calls into question the inde-pendence of the regulator, as it may be the case that he or she will be sub-servient to the bank itself. Consequently, the director of consumer affairswithin the regulatory authority, who is subservient to the chief executive ofthe regulatory authority, is also subservient to the chief executive of the bank.There seems to be a conflict in the fact that an authority that was originallyintended to stand alone and have independent powers to ensure regulationwithin the industry will now have to report continually to the Central Bank.

The staff of the new authority will be recruited from within the CentralBank and the Departments of Enterprise, Trade and Employment andFinance. The new agency’s officials will naturally have a certain bias as aresult of their previous experiences. The chief executive of the new bodydoes not have the independence to appoint his or her own officials, as theywill have to come from the Central Bank or the Departments. Suchprovisions cast doubt on the ability of the new authority to maintain theindependence it will require. The Minister for Enterprise, Trade andEmployment indicated confidence that such independence can be achievedin her response to the publication of this Bill, but many people who havecommented on the Bill since its publication are not convinced.101

Other issues that should be considered when examining the concept of anindependent financial services regulator include:

• What impact would rampant corruption in either the financial servicesindustry and the civil service have on the efficacy of the legal, regulatory,and institutional framework for financial services supervision?

• If a financial services regulator is part of the civil service, and is housed inthe Ministry of Finance, how independent could the regulator be and towhat extent can the regulator be shielded from corrupt practices?

A notoriously troubling experience for several countries is political interfer-ence in the decision-making process of financial services regulators. Quintyn andTaylor argue that in nearly every major financial crisis of the past decade—fromEast Asia to Russia, Turkey, and Latin America—political interference in financial

101 Tithe an Oireachitais, Parliament of Ireland, Central Bank and Financial ServicesAuthority of Ireland Bill, 2002: Second Stage (Resumed), Daily Debates, http://www.irlgov.ie/debates-02/19Jun/Sect2.htm (accessed January 2, 2005).

sector regulation made a bad situation worse.102 The authors observe that politi-cal pressures not only weakened financial regulation generally but they also hin-dered those who enforce the regulations from taking action against banks that raninto trouble.103 In so doing, Quintyn and Taylor assert,104 political pressures crip-pled the financial sector in the run-up to the crisis, delayed recognition of theseverity of the crisis, slowed needed intervention, and raised the cost of the crisisto taxpayers. In countries where financial services regulators lacked independ-ence, that tended to worsen the crisis.105

In many of the world’s recent financial crises, policy makers in the coun-tries affected have sought to intervene in the work of regulators—often withdisastrous results. It is now increasingly recognized that political meddlinghas consistently caused or worsened financial instability. . . . In East Asiain 1997–98, political interference in the regulatory and supervisory processpostponed recognition of the severity of the crisis, delayed action, and, ulti-mately, deepened the crisis. In Korea, for example, a lack of independenceimpeded supervision. While the country’s commercial banks were underthe authority of the central bank (the Bank of Korea) and the Office ofBanking Supervision, Korea’s specialized banks and nonbank financialinstitutions were regulated by the Ministry of Finance and Economy. Theministry’s weak supervision encouraged excessive risk taking by the non-banks, which helped lead to the 1997 crisis. Korea subsequently reformedits supervisory system, both to give it more autonomy and to eliminate theregulatory and supervisory gaps.106

Ruth de Krivoy, former president of the Venezuelan central bank, commentingon the Venezuela banking crisis of 1994, cited ineffective regulation, weak super-vision, and political interference as factors that weakened banks in Venezuela inthe period leading up to the crisis.107 She points out the need for lawmakers to“make bank supervisors strong and independent, and give them enough politicalsupport to allow them to perform their duties.”108


102 M. Quintyn & M. W. Taylor, supra n. 65, at 1.103 See id. at 1.104 See id.105 See id. at 2.106 See id. at 3.107 See id. See also generally R. de Krivoy, Collapse: TheVenezuelan Banking Crisis of ’94(Group of Thirty 2000); and, M. Da Costa, Book Review of R. de Krivoy, Collapse:The Venezuelan Banking Crisis of ’94, 38(1) Fin. & Dev. J. (2001), http://www.imf.org/external/pubs/ft/fandd/2001/03/books.htm (accessed January 2, 2005). 108 M. Quintyn & M.W. Taylor, supra n. 65, at 3.


In Indonesia, banking sector weaknesses stemmed from poorly enforced regula-tions and from the reluctance of supervisors to take action against politically well-connected banks, especially those linked to the Suharto family.109 When the crisishit, central bank procedures for dispensing liquidity support to troubled banks wereoverridden, it was claimed, on the direct instructions of the President.110

Even after Suharto’s fall, political interference continued to undermine thebank restructuring effort.111 The intrusive interventions of Indonesia’s FinancialSector Action Committee, which was composed of several heads of economicministries and chaired by the coordinating minister, undermined the credibility ofthe Indonesian Bank Restructuring Agency’s work.112

In Japan, the lack of independence of financial supervisors in the Ministry ofFinance weakened the Japanese financial sector and contributed to prolongedbanking sector problems.113 Although “there was probably little direct politicalpressure on the Ministry to allow weak banks to continue operating, the systemlacked transparency, and implicit government guarantees of banking sectorliabilities were understood to be widespread.”114 As a result, and given the declin-ing reputation of the Ministry of Finance in the late 1990s, the Japanese Govern-ment created a new Financial Services Agency to oversee banking, insurance, andthe securities markets, in part as an attempt to increase the independence ofsupervision.115

2.5 Arguments For and Against the Independent Regulator

Generally, it is well accepted that independent regulators can initiate marketinterventions shielded from political interference so as to improve regulatory andsupervisory transparency, stability, and expertise.116 However, is the concept ofan independent regulator always good for the financial sector, and should a reg-ulatory agency enjoy absolute independence?

In countries that are moving from a command economy, where financialmarkets and instruments are fairly weak, there might be good reason for the

109 See id. at 3. 110 See id.111 See id.112 See id.113 See id.114 See id.115 See id. at 4.116 See id. at 5.

government to intervene occasionally and strategically, for instance in cases thatinvolve the threat of the insolvency of strategic firms. There, the State should beallowed, though only occasionally, to direct market forces as long as there is goodcause for such intervention. By contrast, in countries that have well-developedfinancial markets and instruments, the financial sector may benefit more fromabsence of State intervention. The presence of a strong infrastructure and regula-tory framework in these countries, including a culture where contractual rightsare enforced, means that State intervention is not necessary for the market tofunction efficiently. Overall, there is increasing evidence from a number of coun-tries suggesting that independent regulators have made regulation more effective,have led to smoother and more efficient operation of the market, and are a dis-tinct improvement over regulatory functions located in government ministries.117

As we have already pointed out, the idea of an independent central bank providesan example of the success of such an independent regulator in fighting inflation.Since the late 1980s, more and more countries have freed their central banks frompolitical control because evidence was growing that independent central banks aresuccessful in achieving monetary stability—in other words, controlling inflation.118

Making central banks independent frees them from political pressure and thusremoves the inflationary bias that could otherwise unsettle monetary policy.119

Although the IMF argues that the disincentives for politicians to rescue failingbanks, for example, are similar to those for government inaction in the face ofinflation, in that the decision to close a failing bank is usually unpopular,120 insome developing countries—especially those that are heavily dependent on onesegment of the financial sector—there might be good cause, after identifying therole the State can play in the process of privatization, commercialization, orwinding up of a State bank to allow for some degree of State intervention or par-ticipation. In such countries, although government subsidies to support the run-ning of a State bank often lead to high fiscal costs, the ill-conceived privatizationor liquidation of the State bank can also lead to high social costs, such as unem-ployment where the State bank has been a major employer. There is need, there-fore, to consider the role of the State and any other mitigating factors, such as theuse of employee share-ownership schemes, while factoring in the social costs thatcould result if privatization is not handled properly.

A common argument against the whole idea of an independent financialservices regulator is that such agencies tend to respond to the wishes of the


117 See id.118 See id. at 4.119 See id.120 See id.


best-organized interest groups.121 It has been argued, for example, that:

When regulators are free from political control, the risk of “regulatory cap-ture” by other groups—in particular, the industry they regulate—grows.Agencies that suffer from such capture come to identify industry interests(or even the interests of individual firms) with the public interest. Andindustry capture can undermine the effectiveness of regulation just as polit-ical pressure can.122

Where there is industry capture, regulators may, for example, formulate rulesso as to minimize industry costs rather than strike an appropriate balance betweenthose costs and public benefits.123 They may also apply rules inconsistently andexempt individual firms from certain requirements.124

In evaluating the merits and demerits of an independent regulator, it could beuseful to ask the following questions:

• In a country that does not have a well-developed and longstanding traditionof, e.g., banking supervision, why should a banking supervisory agencyplace a high premium on independence when there is not yet the institu-tional capacity and critical mass to deliver efficiently? Would not such anagency be more effective if it were to work in liaison with the governmentto find ways to improve its supervisory capacity first?

• In countries with relatively weaker economies, how financially independ-ent should a regulator be, especially if the agency has just been establishedand requires substantial financial resources to get its work off the ground?Where will the resources come from?

• In a young and emerging economy, with a new stock market (financed bythe State budget and the international donor community), for example, howfar from the Government’s national development agenda can the regulatorstray in its policy for the development of the securities market?

These are some of the thorny issues that confront financial sector experts indesigning models of financial services regulation. In sum: Should a regulator beabsolutely independent? What does “absolute independence” mean? Or shouldthe independence of a regulator be incremental, tracking the development of thefinancial market and business conduct in that market? It appears plausible to

121 See id. at 5.122 See id. at 5–6.123 See id. at 6.124 See id.

argue that the concept of an independent regulator is relative and best understoodby measuring independence against the yardstick of accountability and thedegree of development of the financial sector as well as the regulator itself.

Another argument against the idea of an independent regulator, then, relates tothe accountability of the regulator. An independent regulator might pursue anagenda of its own, going against the wishes of the political majority.125 If thiswere to happen, the policy objectives of the government for the soundness of thefinancial services industry might not be carried out fully. Some commentatorshave branded independent regulatory agencies the “fourth branch of govern-ment,” implying that they are outside the control of the traditional three branchesthat keep mature democratic systems in equilibrium through a system of checksand balances.126 Quintyn and Taylor observe that, although such fears appear tobe exaggerated, they nevertheless demonstrate the importance of having properforms of accountability to balance the disadvantages of agency independence.127

It could be argued that achieving both independence from the industry regu-lated and political independence is as important as ensuring that the independentregulator is accountable. Quintyn and Taylor, however, argue that political inde-pendence remains the prime concern from the point of view of financial stability,given the vested interests that many national governments still have in the bank-ing system—and therefore in bank regulation—as well as the dismal track recordof political independence in supervisory arrangements.128

2.6 Conclusion

This chapter has examined the idea of promoting the independence of a financialservices regulator as a corollary to the development of an efficient and effectiveregulatory framework for financial services supervision. The chapter examineddifferent aspects of independence with a view to showing that law reform pro-fessionals, policy makers, and institutions concerned with the development of thelaw should indeed concern themselves with the independence of financial serv-ices regulators. The chapter highlighted the key features of a modern regulatoryframework that enhance the independence of a regulator. Fundamental questionswere raised regarding the independence of a financial services regulator: whetherindependence would necessarily guarantee quality regulation, and whether themere fact that a financial services regulator is independent would prevent a finan-cial crisis.


125 See id.126 See id.127 See id.128 See id.


It was argued that the concept of an independent regulator is not only relativebut that it is best understood by measuring independence against the yardstick ofaccountability and the degree of development of the financial sector and the reg-ulator itself. Also, it was observed that although the concept of an independentregulator provides incentives for enhanced quality in regulation, the independ-ence of a regulator may not necessarily prevent a financial crisis. The cardinalpoint discussed in the chapter is that achieving both political independence andindependence from the industry regulated is as important as ensuring that theindependent regulator is accountable.




by Kishor Uprety










Publishers, Moscow








C H A P T E R 3

The Concept of a Unified Financial Services Regulator

3.1 Introduction

This chapter examines the concept of a unified financial services regulator, high-lighting differences in the approaches taken by different countries. The first partof the chapter explains the difference between a partially unified regulator and afully unified regulator, fleshing out the obstacles and challenges different coun-tries have faced in implementing models of unified financial services regulation.The second part endeavors to inform both policy and practice choices, examin-ing issues and themes in the contemporary debate on unified financial servicessupervision. Then, examples of unified financial services supervision are laidout, showing the divergences in practice and approaches to structuring a unifiedregulator. The chapter concludes by reviewing a World Bank study so as to high-light lessons learned about unified financial services supervision and the valuethis book can add to the debate.

In many countries, the unified regulator is structured on either a functional ora silos matrix, depending on local conditions and the objectives of regulation.129

As noted in Chapter 1, where departments of a regulatory agency, such as theLegal, Licensing, Supervision, and Investment Policy Departments, deal withdifferent financial services and products across the financial sector without seg-regating these services and products on the basis of the type of business activityor the type of institution offering them, the regulator is said to be organized alongfunctional lines. To illustrate, in a functional matrix, the Licensing Departmentwould license insurance companies, securities firms, pension funds, banks, andall other financial intermediaries, including stockbrokers and collective invest-ment schemes. By contrast, in a silos matrix a particular organizational unitwould deal exclusively with the regulation and supervision of insurance, anotherwould deal only with pension funds, and so on, with no crossing over into otherareas of financial services. Here, although all supervisory functions are undertaken

37

129 Here and elsewhere in the chapter, the word “regulation” can be substituted for the word“supervision,” where the unified regulator has powers to both issue regulations and super-vise financial services. Also, the word “regulation” can be used interchangeably with theword “supervision,” depending again on whether the unified regulator has both powers.


by the regulator as a whole, insurance businesses are licensed and supervised sep-arately from, say, securities firms or banks. The competing interests of variousstakeholders can also have a bearing on the organizational structure of a unifiedregulator.

Another important distinction is that unification may be partial or full.Normally, where only two segments of the financial sector are supervised by asingle regulator, as are pension funds and insurance companies in Zambia,130 theregulator is said to be partially unified. Other examples of a partially unifiedregulator can be found when regulation of securities and insurance, banking andsecurities, or banking and insurance is combined. Any of these regulators may behoused within or outside the central bank, depending on a host of factors, such asthe availability of office space, the availability of human and financial resources,and the objectives of financial services supervision.

A fully unified regulator will normally supervise all business activities in thefinancial sector, as does the UK’s FSA. The structure and staffing of such a reg-ulator is determined by such factors as where the regulator is housed and whetherit undertakes prudential supervision only, conduct of business only, or both.

Assuming a country opts for a unified regulator, what does international expe-rience tell us about the processes, obstacles, and approaches to establishing a uni-fied regulator? Table 3.1, based on primary data, summarizes some answers tothat question.

To further inform policy and practice choices, the next section examines thesalient features of the debate about unified financial services supervision.

3.2 The Unfolding Debate

The academic debate about unified financial services supervision began in thelate 1980s in the UK; it has now been joined by international organizations.Among the issues around unified financial services supervision confrontingcountries the world over are whether to establish a unified regulator and, if so,how to structure its institutional and regulatory framework. At the outset, it isimportant to point out that issues of regulatory organization are essentiallysecond-order issues. Far more important—the first-order issue—is how to imple-ment financial supervision, in particular supervisory capacity, and its quality andthe soundness of the legal framework for supervision.

Over the years, financial supervision has often been organized, silo style,around specialist agencies that have separate responsibilities for banking,securities, and insurance sectors, but in recent years there has appeared a trend

130 See generally below.

The Concept of a Unified Financial Services Regulator 39

TABLE 3.1

Structuring Unified Regulators: Processes and Obstacles

Separation of Regulation Independence

Country from Supervision of Regulatory Agency Accountability

Latvia Both functionsdone by the unified agency

Reasonably independentCEO and deputy

appointed throughParliament

Autonomous statutoryinstitution

Financed from marketlevies

Annual audits filedwith Parliament

UnitedKingdom

Both functionsdone by theunified agency

Reasonably independentCompany limited by

guaranteeFinanced from market

levies

Internal audit, providingaccountability tothe FSA Boardand Executive

Norway Regulations oftenlaid down byMinistry ofFinance andthe King

Supervisionundertaken byunified agency

Statutory body: TheKing appoints theCEO and the deputyCEO, raising ques-tions of the politicalindependence of theagency

Also, the King appointsthe entire Board, andthere is considerableMinistry of Financeinvolvement in administration

Funded from marketlevies

Annual reporting onactivities to theappropriate Ministry

Hungary Both functionslargely done bythe unifiedagency

Statutory bodyIndependence not well

developed: PrimeMinister nominatesCEO and DeputyCEO, then Parliamentappoints

Largely funded frommarket levies

Annual reporting toboth Parliamen-tary Committeeand Government

(Table continues on the following page.)


Korea Both functionsdone by theunified agency

Statutory body, FSS(Financial Supervi-sory Services), isfairly independent.The Chairman ofFSC (Financial Supervisory Commission) is the Governor of FSS, andFSC appoints seniorofficers of FSS

FSS auditor is appointedby President

Funded from marketlevies

FSS is accountableto FSC and SFC(Securities andFutures Commission)

Jamaica Both functionsdone by the unified agency

Statutory bodyReasonably independent

regulator; appoints itsown CEO

Funded partially fromparliamentary alloca-tions and from marketlevies

Reports to the Minister within90 days of the supervisory examination

Finland Both functionsdone by theunified agency

Statutory body Reasonably independent;

works closely with thecentral bank

However, there are anumber of politicians(e.g., three deputyministers) on itsBoard

Funded mainly frommarket levies

Presents an annualreport to the ParliamentarySupervisory Council

Source: Compiled by this author, based on information provided by regulatory agencies andan assessment of country laws and regulations.

TABLE 3.1 (continued)

Separation of Regulation Independence

Country from Supervision of Regulatory Agency Accountability

toward restructuring financial supervision into unified regulatory agencies—agencies that supervise two or more of these areas. A number of commentarieshave been written on unified financial services supervision, discussing its advan-tages and disadvantages.131

Several economic scholars have advanced arguments for the advantages of a uni-fied model.132 The arguments relate to such factors as the economies of scale andscope that arise because a single regulator can take advantage of a single set of cen-tral support services; increased efficiency in allocation of regulatory resourcesacross both regulated firms and types of regulated activities; the ease with whichthe unified regulator can resolve efficiently and effectively the conflicts thatinevitably emerge between the different objectives of regulation; the avoidance ofunjustifiable differences in supervisory approaches and the competitive inequali-ties imposed on regulated firms when multiple specialist regulators have inconsis-tent rules; and, where a unified regulator is given a clear set of responsibilities, thepossibility of increased supervisory transparency and accountability.133

What are some of the preconditions for establishing a unified regulator? Theseare among the decisive factors:

• Sound and sustainable macroeconomic policies• The necessary political will among stakeholders

131 See, for example, the bulk of the literature reviewed in International DevelopmentsParts I and II, supra n. 1; and K. K. Mwenda, supra n. 1.132 See, for example, supra nn. 113–16.133 See generally C. Briault, The Rationale for a Single National Financial Services Reg-ulator, Occasional Paper Series No. 2 (Financial Services Authority May 1999). Inanother paper, Briault (see C. Briault, A Single Regulator for the UK Financial ServicesIndustry, Financial Stability Review [November 1998]) observes that the benefits of aunified regulator include

• the harmonization, consolidation, and rationalization of the principles, rules, andguidance issued by existing regulators or embedded within existing legislation,while recognizing that what is appropriate for one type of business, market, or cus-tomer may not be appropriate for another;

• a single process for the authorization of firms and for the approval of some of theiremployees, using standard processes and a single database;

• a more consistent and coherent approach to risk-based supervision across the finan-cial services industry, enabling supervisory resources and the burdens placed onregulated firms to be allocated more effectively and efficiently on the basis of therisks facing consumers of financial services;

• a more consistent and coherent approach to enforcement and discipline, while rec-ognizing the need for appropriate differentiation; and

• in addition to a single regulator, single schemes for handling consumer complaintsand compensation, and a single independent appeals tribunal.

See also M. Taylor & A. Fleming, Integrated Financial Supervision: Lessons from North-ern European Experience, Policy Research Working Paper 2223 11 (World Bank 1999).



• Cooperation and sharing of information among financial services regula-tors as a country moves toward a single unified regulator

• Skilled human capital to support establishment and operation of the unifiedregulator

• Financial resources to support establishment and operation of the unifiedregulator

• Conglomerates and cross-ownership of groups of companies that pose riskof contagion during a financial crisis and are thus a good case for a unifiedregulator

• The practice of universal banking, also a good case for a unified regulator• The interconnectedness of segments of the financial sector, assuming it has

reached a minimum level of sophistication • The emergence of new financial instruments and services from many

segments of the financial sector• The internationalization of best practices for unified financial services

regulation • A well-developed public infrastructure to support the establishment of a

unified regulator• Effective market discipline to provide similar support.

Generally, where there are both sustainable macroeconomic policies andeffective market discipline, the presence of a well-structured framework forfinancial services supervision is likely to provide incentives to stimulate theconduct desired of market participants. Such a framework must be supportedby sufficient operational and financial resources. Also, there must be effectiveenforcement of laws and regulations, avoiding at all costs politically motivatedregulatory forbearance. In some developing countries, models of unifiedfinancial services supervision have been introduced that correspond with what ishappening in the financial sector of some developed countries. In Europe, wherethe United Kingdom, Ireland, Germany, Norway, and Sweden have all set upunified regulators, the transition economies of the former Eastern bloc arenow trying to imitate them, believing, of course, that this will help them gainquicker access to the European Union markets. From the point of view of thetransition economies, such efforts constitute the internationalization of bestpractices.

Often, the establishment of a unified regulator is supported by the politicalwill of major stakeholders. It is difficult to think of a buoyant and sound regula-tor that does not enjoy the support of its major stakeholders. If that were the case,even the enforcement of the law would be affected adversely: the lack of politicalwill would undermine the legitimacy of the regulatory system, and enforcementof the law by demotivated policing parties would be lax.

To garner the political will of major stakeholders, the various financial ser-vices regulators should cooperate and share information as a country movestoward a single unified regulator. Also, the unified regulator should be staffedwith people well qualified to carry out its functions.

Among the arguments making the case for a unified regulator is the view thatunification can lead to economies of scale and scope within the regulatoryagency. Also, a simplified single regulator can provide a system of operation thatis more user-friendly to both regulated firms and consumers. Presented equallystrongly are arguments postulating that establishing a unified regulator can meanintroducing a regulatory structure that mirrors the business of regulated institu-tions and avoids problems of competitive inequality, inconsistencies, duplication,overlap, and gaps—the kinds of problems that can arise in a regulatory regimebased upon several agencies. Models of a unified regulator have in many coun-tries also been predicated on arguments that a mega-regulator can more rationallyutilize scarce human resources and expertise, while also providing more effectiveaccountability and reducing the costs imposed upon regulated firms (since theywould need to deal with only a single regulator).

Meanwhile, others have pointed out possible shortcomings of the model; theseinclude the possibility that a unified regulator may erode traditional functionaldistinctions between financial institutions and that it may not have a clear focuson the objectives and rationale of regulation (in other words, that it does not makethe necessary differentiations between different types of institutions and busi-nesses, such as wholesale and retail). There is also a fear that a unified regulatorcould lead to cultural conflict within the agency when regulators come from dif-ferent sectors.

It is also argued that setting up a unified regulator may create an overly bureau-cratic agency that has excessively concentrated power, posing the possibility thatthe risk spectrum among financial institutions may disappear or at least becomeblurred. Here, even the merits of economies of scale would be watered downwhere the unified regulator is seen as supervising almost everything under thesun and thus becoming monopolistic. Such an overwhelming “Christmas tree”effect can, in turn, lead to inefficiencies, such as bureaucratic red tape and pos-sibly corruption if the regulatory and institutional framework does not provide foreffective checks and balances.

Further, where there are other pressing matters to be dealt with in the econ-omy, such as the resolution of a banking crisis, it might be ill-advised to rushinto unifying regulatory agencies in the financial sector, unless unification ispart of the overall strategy for resolving the crisis. Also, the transition to a uni-fied regulator should be accompanied by appropriate systemic protections. Inthe UK, where there has been considerable academic and practitioner debateabout the merits of an integrated model and where it has been argued that



monetary and financial stability are related,134 the following six themes havedominated the debate135:

1. The rapid structural change that has taken place in financial markets wasspurred by an acceleration in financial innovation. This has challenged theassumptions behind the original structuring of regulatory organizations.There follows the question of whether institutional structure should mirrorthe evolution of the structure of the financial sector.

2. The realization that financial structure in the past has been the result of aseries of ad hoc and pragmatic policy initiatives raises the questionof whether—particularly in the wake of recent banking crises anddislocation—a more coherent structure should be put in place.

3. The increasing complexity of financial business, as evidenced by the emer-gence of financial conglomerates, has raised the issue of whether a seriesof agencies supervising parts of an institution can have a grasp of develop-ments within the business as a whole.

4. The demands on regulation, and its complexity, have been increasing, inparticular the surfacing of a need for enhanced regulation of “conduct ofbusiness,” especially in the sale of financial products like pension schemesand consumer insurance policies.

5. Financial innovation is changing the risk characteristics of financialfirms.

6. The increasing internationalization of banking has implications for theinstitutional structure of agencies at the national as well as the internationallevel.

134 See Taylor & Fleming, id. at 2. In that paper, Taylor and Fleming argue that: “An impor-tant issue in deciding to adopt a unified supervisory agency is to consider whether itshould be concerned exclusively with prudential [that is, safety and soundness] regula-tion, or whether it should also have responsibility for conduct of business. . . . [It] shouldbe noted only the United Kingdom, of the countries surveyed, has created a unified regu-lator with both prudential and conduct of business responsibilities.”135 See Taylor & Fleming, id. at 3. See also generally C. A. E. Goodhart, P. Hartman, D. T.Llewellyn, L. Rojas-Suarez & S. Weisbrod, Financial Regulation (Routledge 1998);M. Taylor, Twin Peaks: A Regulatory Structure for the New Century (Centre for the Studyof Financial Innovation 1995); M. Taylor, Peak Practice: How to Reform the United King-dom’s Regulatory System (Centre for the Study of Financial Innovation 1996); C. A. E.Goodhart, The Costs of Regulation, in Financial Regulation or Over-Regulation (A.Sheldon ed., Institute of Economic Affairs 1988); and C. Briault, The Rationale for aSingle National Financial Services Regulator, supra n. 133.

This chapter, building on the ongoing debate,136 takes stock of various devel-opments relating to the organization of unified regulatory agencies. It seeks toprovide perspectives on structural issues confronting unified regulators in differ-ent parts of the world.

3.3 Examples of Unified Regulators

3.3.1 Bulgaria

Bulgaria established a unified regulator for nonbanking financial services only,the Financial Supervisory Commission (FSC), on March 1, 2003.137 Bulgaria’sFSC was set up pursuant to the Financial Supervision Commission Act 2003.138

Primary motivations for setting up the FSC were the increased consolidation offinancial markets in the country; the overlap of activities of investment funds,insurance companies, pension funds, and some banking institutions; and theemergence of new financial institutions and products. To a large extent, all thesereflected developments in Western Europe.139 Today, the FSC is structured as asilos matrix. Its regulatory and supervisory functions are undertaken by threespecialized divisions: Investment Supervision, Insurance Supervision, and SocialInsurance Supervision.140 The structure of these divisions has been adapted to

136See for example: Taylor & Fleming, id. at 1; R. K. Abrams & M. Taylor, Issues in theUnification of Financial Sector Supervision, IMF Operational Paper MAE/00/03 (IMF,Monetary and Exchange Affairs Dept. 2000); D. T. Llewellyn, Introduction: The Institu-tional Structure of Regulatory Agencies, in How Countries Supervise Their Bank, Insur-ers and Securities Markets (Central Banking Publications 1999); L. Sundararajan,A. Petersen, & G. Sensenbrenner, Central Bank Reform in the Transition Economies (IMF1997); C. A. E. Goodhart, P. Hartman, et al., id.; Taylor, Twin Peaks, id; Taylor, Peak Prac-tice, id.; Goodhart, id.; Briault, Rationale, supra n. 133; D. T. Llewellyn, paper presentedat the conference on Regulation and Stability in the Banking Sector, Some Lessons forBank Regulation from Recent Cases (De Nederlandsche Bank, Amsterdam, November3–5, 1999); Mwenda, supra n. 72; B. Drees & C. Pazarbasioglu, The Nordic Banking Cri-sis: Pitfalls in Financial Liberalisation? Occasional Paper 161 (IMF 1998); C. Lindgren,Authorities’ Roles and Organizational Issues in Systemic Bank Restructuring, WorkingPaper WP/97/92-EA (IMF 1997); M. Blair, R. Cranston, C. Ryan & M. Taylor, Black-stone’s Guide to The Bank of England Act 1998 (Blackstone Press Limited 1998); Briault,A Single Regulator, supra n. 133; and Bartolini, The Financial Services Authority: Struc-ture, Mandate, and Policy Issues, in Samiei, et al., supra n. 77.137 See generally below. 138 Financial Supervision Commission Act 2003 of Bulgaria, Articles 1(1) and 2(1).139 Financial Supervision Commission of Bulgaria, “About the Commission,” http://www.fsc.bg/e_fsc_page.asp?v=2 (accessed April 15, 2004).140 See id.



FSC’s major roles, which are the issuance of licenses and the carrying out ofexaminations.141 The Insurance Supervision Division comprises the followingthree directorates: Regulatory Regimes and Consumer Protection; Inspectionsand Financial Supervision; and Regulatory Policy and Analysis. The Social Insur-ance Supervision Division consists of two directorates, the Regulatory Regimesand Risk Evaluation Directorate, and the Control Activities Directorate.142 TheInvestment Supervision Division comprises the following three directorates:Regulatory Regimes; Supervision and Procedural Representation; and MarketAnalyses.

The Bulgarian FSC considers itself an independent body that is not influencedby the executive arm of the State.143 Functionally, FSC reports to the NationalAssembly and operates as a specialized government body for regulation of thenonbanking financial sector,144 carrying out functions that were previously thedomain of the former State Securities Commission, the State Insurance Supervi-sion Agency, and the Insurance Supervision Agency.145 The primary functions ofFSC are to facilitate, through legal, administrative, and informational means, andto maintain stability and transparency in, the investment, insurance, and socialinsurance markets.146

3.3.2 Zambia and Jamaica

The Zambian model of unified financial services supervision is unique.147

Zambia has a twin system of unified financial services supervision: on the onehand, the Central Bank of Zambia (BOZ) has separate departments to supervisebanks and nonbanking financial institutions; on the other, the Pensions and Insur-ance Authority (PIA) is responsible for supervising insurance companies andpension funds, even though both are in essence nonbanking financial institutionsnot that much different from those supervised by BOZ. One possible explanationfor the anomaly could be that, under section 2 of the Banking and Financial Ser-vices Act of 1994, pension funds and insurance companies are not recognized asfinancial institutions that carry on “financial services business other than banking

141 See id.142 See id.143 See id.144 See id.145 See id.146 See id.147 See generally K. K. Mwenda, Unified Financial Services Supervision in Zambia: TheLegal and Institutional Frameworks, 36 Zambia L. J. 67–110 (2004), in which the effi-ciency of this model is examined in greater detail.

business.” Another plausible argument is that the relevant department of BOZ isconcerned only with the regulation and supervision of nonbanking financialinstitutions that accept deposits taking or provide loans.

A comparison could be made here with the institutional and regulatory frame-work for financial services supervision in Jamaica:

The Bank of Jamaica (BOJ) has supervisory responsibility for deposit-taking institutions licensed under the financial legislation administered bythe Central Bank. This responsibility is discharged by the Central Bank’sFinancial Institutions Supervisory Division and covers commercial banks,merchant banks, building societies, and more recently credit unions fol-lowing their designation as specified financial institutions by the Ministerof Finance and Planning in 1999.148

The Jamaican unified regulator, the Financial Services Commission, establishedunder the Financial Services Commission Act of 2001, has overall responsibilityfor the regulation and supervision of institutions “that provide non-deposit-takingfinancial services in connection with insurance, the acquisition or disposal of secu-rities within the meaning of the Securities Act and units under a registered unit trustwithin the meaning of the Unit Trust Act.”149

From a public policy point of view, the argument in favor of BOZ regulatingZambian nonbanking financial institutions that accept deposits and make loansis premised on the need to protect the public should a nonbanking financial insti-tution default.

3.4 Deciding Whether to Unify Financial Services Supervision

Should every country adopt a model of unified financial services supervision?The answer is a clear “no.” Some countries would benefit from unification ofonly a few regulatory agencies. For example, the unification on April 1, 2002 oftwo agencies responsible for supervising pension funds and insurance businessesin Poland helped to strengthen regulation of financial services there.150 Eachcountry’s framework must be structured with the objective of meeting the chal-lenges of its own financial sector.

148 Bank of Jamaica, Supervision of Financial Institutions, http://www.boj.org.jm/supervised_financial.php (accessed July 13, 2005).149 D. C. Walker, The Powers of the FSC, Jamaica Gleaner (Friday, June 22, 2002),http://www.jamaica-gleaner.com/gleaner/20020614/business/business7.html (accessedMay 25, 2004).150 See generally Mwenda, supra n. 1.



What, then, is the ideal structure of a unified financial services regulatoryagency? There is no rigidly fixed answer to that question. Different countrieshave taken different routes and approaches for a variety of reasons that may be,for instance, ideological, historical, economic, or political, or a combinationthereof. Until there is a longer track record of experience with unified agencies,it is difficult to come to firm conclusions about their optimal structure. In somecountries, for various reasons, some of them political, unification of all the majorfinancial services regulatory bodies may be desirable. Yet that might not beappropriate in a country where in the financial sector there are limited connec-tions among sector components or where there is no practice of universal bank-ing or evidence of conglomerates. In countries where segments of the financialsector are well connected, there is a good case for moving toward unified super-vision as the nature of banking and other financial services business evolves toencompass more complex and multifunctional operations.

3.5 A Contingency Approach

The discussion in this section shows that, though in the last few years a numberof countries have moved to integrate different supervisory functions into a singleagency,151 how unified financial services supervision has been adopted andapplied has varied from country to country. In approximately half the countriesexamined in a July 2000 study,152 the regulatory structures were still based onspecialist agencies, with banking, insurance, and securities each supervised by adedicated agency153 (see table 3.2). The other countries surveyed had combinedelements of supervision into partially or fully unified supervisory agencies.

In a number of countries where separate supervisory agencies existed, thebanking supervisor was the central bank, but this was not always the case.154 InSouth Africa and the Slovak Republic, for instance, the securities and insurancesectors had a common regulator, while banks were regulated by a specialistagency.155 Thus,

the unified model is not as common as the recent attention it has receivedseem to suggest. The ten countries classified as having adopted this orga-nizational form are Australia, Canada, Denmark, Iceland, Japan, Norway,the Republic of Korea, Singapore, Sweden, and the United Kingdom.

151 Taylor & Fleming, supra n. 133, at 1.152 See Abrams & Taylor, supra n. 136. See also, generally, Llewellyn, supra n. 136.153 Abrams & Taylor, supra n. 136, at 6.154 See id. at 6.155 See id.

However, in at least two cases—Australia and Canada—the regulatorystructure is not fully unified as securities regulation is conducted separatelyfrom banking and insurance regulation. Moreover, in Singapore’s case, reg-ulation has been unified within the central bank. This leaves only sevencountries that have fully unified regulatory agencies separate from the cen-tral bank. Over half of these are in the Nordic countries. This observationmay suggest that unified supervision has, to date, been a response tocountry-specific factors, and as such may not be universally applicable.156

3.6 Lessons Learned from Experience

Today, a number of countries are beginning to re-examine how their financialsupervision is organized. While the observations just quoted are valid, there issome danger of viewing the cup as half empty when it might equally be consid-ered half full. In fact, increased importance is being placed on the design of effi-cient and effective structures to support financial services supervision, and insome cases this is leading to partial or full unification. There is as yet no singleright way of introducing or implementing unified models of financial servicessupervision. In Africa, for example, Mauritius has legislation that establishes aunified financial services regulatory agency. As the Mauritius InternationalFinancial Services Centre observes:

The Financial Services Development Act 2001 consolidates our existingregulatory and supervision frameworks while simultaneously putting in

TABLE 3.2

Regulatory Structures in Selected Countries as of July 2000

Separate agencies for each main sector 35

Combined securities and insurance regulators 3

Combined banking and securities regulators 9

Combined banking and insurance regulators 13

Unified supervision (in central bank) 3

Unified supervision (outside central bank) 10

Source: Adapted from Central Banking Publications, How Countries Supervise Their Bank,Insurer and Securities Markets (Central Banking Publications 1999), as quoted in R.K.Abrams & M. Taylor, Issues in the Unification of Financial Sector Supervision, IMFOperational Paper MAE/00/03 6 (IMF, Monetary and Exchange Affairs Dept. 2000).

156 See id. at 7.



place a unified regulatory framework for the financial services sector. Thisnew legislation also reflects changes made in line with initiatives of inter-national bodies such as OECD, FATF, UN Offshore Forum and core princi-ples of international supervisors. . . . The single regulatory framework hasbeen achieved through a phased approach by the setting up of the FinancialServices Commission on 1st December 2002 responsible for the licensing,regulation and supervision of the non-bank financial services and, at a laterstage, after a review of the exercise to be carried out in three years’ time, tothe eventual integration of the Financial Services Centre with the CentralBank i.e. the Bank of Mauritius, into a single unified regulatory authorityfor the whole financial services sector157

Before the Mauritius Financial Services Development Act was enacted in2001, regulatory oversight extended only to banking, insurance, securities, andoffshore services, leaving certain sectors, such as fund management, pensionsfunds, leasing companies as well as financial intermediaries, partially or com-pletely unregulated.158 Yet the unregulated or partially regulated sectors are high-risk investment areas not only for depositors and investors but also for the stabil-ity of the entire financial system.159

In South Africa, as noted previously, the securities and insurance sectors havea common regulator, while banks are regulated by a specialist agency. In Nigeria,pension funds and some other financial services are supervised by the same reg-ulatory agency, but the insurance business is supervised by a separate agency.Another African country that has a partially unified supervisory system is Zam-bia. While BOZ regulates financial institutions like banks, building societies, andbureaux de change, PIA regulates only insurance companies and pension fundsand the Securities and Exchange Commission is concerned mainly with securi-ties regulation. It appears that a good number of African countries are leaningtoward partial unification.

In Europe, one commentator observed:

It is pleasing to see that throughout Europe there is a steady trend towardintegration of one kind or another. As well as the UK, other European coun-tries such as Germany, Netherlands, Belgium, Austria, Denmark, Sweden,Norway, as well as a number of the accession countries such as Estonia andHungary have all moved to an integrated model of one kind or another.

157 Mauritius International Financial Services Centre, Financial Services PromotionAgency: Legislative Value, http://www.mauritius-finance.com/legislate.html (accessedJune 28, 2004). 158 See id.159 See id.

Indeed, even the term “integrated regulation” is interpreted differently indifferent places. For example, in the UK we take it to mean the integrationof all regulated financial services and to cover both Prudential supervisionand the regulation of advice, sales and customer aftercare (what have tradi-tionally been grouped together in the UK under the broad term Conduct ofBusiness regulation). Other countries have integrated regulation of the dif-ferent sectors, but have kept Prudential and Conduct of Business regulationseparate. Indeed, I have heard some argue that there is an inherent conflictand contradiction between Prudential supervision and Conduct of Businessregulation and that these cannot be solved within a single regulatory insti-tution. I disagree with this point very strongly.160

Closely related to these developments in European countries, in Malta:

The MFSC [Malta Financial Services Centre] has been re-constituted as theMalta Financial Services Authority and its statutory functions are beingrevised to reflect its role as a single regulatory agency. It is not surprisingthat in the light of the huge new responsibilities placed on it, the MFSA’sinternal structures have had to be re-appraised. The 1994 reforms had leftthe original offshore authority MIBA [Malta International BusinessAuthor-ity] structure almost untouched. This may have been adequate for a smallorganization—at its peak, the then-MIBA had 24 employees. The currentorganization employs in excess of 120. Accordingly, the amendments pro-vide a new internal architecture for the MFSA. A new Supervisory Councilreplaces the former Executive Committee, in place since 1989, as the regu-latory arm of the new authority. This new Council is presided over by thenewly created Director-General and groups the heads of all the regulatoryunits. The amendments safeguard full continuity between the MFSC and theMFSA and between the former Executive Committee and the new Supervi-sory Council. This guarantees the continued validity of all licences andactions issued or taken under the old structure.The transition will be entirelypainless . . . The description of the functions of the Authority has been com-pletely revamped. The MFSA has now been assigned a new strikinglyexplicit consumer protection orientation. Formerly this was only indirectlystated or implied. Now it is stated very specifically. The new Act has alsoestablished a new office for the specific purpose of handling of consumer

160 Integrated Financial Services Regulation: A Benchmark for Europe 1–2 (CEA Con-ference, November 25, 2003), http://www.cea.assur.org/cea/v1.1/actu/pdf/uk/annexe137.pdf (accessed May 25, 2004).



complaints in relation to financial services. A Consumer Complaints Man-ager “CCM”, answerable to the Supervisory Council, has been appointed.161

In the case of the Philippines, Milo argues, financial services integration refersto the production or distribution of financial services traditionally associatedwith one of the three major financial sectors (banking, insurance, and securities)by service providers from another sector.162 She notes that financial services inte-gration can occur through the blurring of product lines because of innovation.163

Similarly, for Germany, a report citing the German Minister of Finance spells outthe following:

The products and modes of distribution of banks, insurance companies, andsecurities firms are becoming more and more alike. In many cases, the dis-tinctions are difficult to recognise, e.g., in the case of mortgage loans. Insuch cases, centralised supervision and equal treatment of equal risks areneeded in order to ensure competitive neutrality. This can be achievedthrough the new integrated financial supervision. . . . There is a trendtoward financial conglomerates in Europe which combine banks, insurancecompanies, and securities firms. . . . We must react to this developmentwith an integrated and proactive supervisory system. The existing supervi-sory structure does not allow us to respond to the new risk scenarios posedby intersector combinations. The new integrated financial supervisory sys-tem can better protect the interests of investors and consumers.164

In Switzerland, a 2001 reports shows that Swiss banks threw their weightbehind a government proposal to integrate the supervision of banking and insur-ance to ensure seamless regulation of the financial services industry.165 It isexpected that the merging of the Swiss Federal Banking Commission and theSwiss Federal Private Insurance Bureau into one agency will improve the flow of

161 Malta Financial Services Authority, Recent Amendments to Malta’s Financial ServicesLegislation: A Review of Some Major Aspects of ACT no. XVII of 2002, http://www.miamalta.org/MagSept02Page05.htm (accessed June 28, 2004).162 M. Milo, Financial Services Integration and Consolidated Supervision: Some Issuesto Consider for the Philippines, A Perspective Paper on Banking (PowerPoint presenta-tion, at 4), http://dirp3.pids.gov.ph/silver/documents/MSM%20presentation.pdf.(accessed November 18, 2004).163 See id. at 4.164 First Experiences with Integrated Financial Market Supervision in Germany(Gdanskiej Akademii Bankowej: Gdansk, Poland, 2003), p. 5, http://www.gab.com.pl/rn/materialy/2003/Volker_Henke.doc (accessed on May 25, 2004).165 Dawn (Internet edition), Integrated Financial Supervision Favoured (Thursday,February 1, 2001), http://dawn.com/2001/02/01/ebr12.htm (accessed May 25, 2004).

information and better reflect the trend toward consolidation in the industry.166 Ina public statement, the Swiss Bankers Association welcomed a suggestion froma group of government-commissioned experts that independent asset managers,called introducing brokers and foreign exchange traders, be adequately regulated;the association observed:

All in all, we are convinced that the quality and reputation of Switzerlandas a financial centre can be significantly strengthened by regulating finan-cial intermediaries who have not been regulated until now.167

In the Pacific, Australia has a “twin peaks” model of unified financial serv-ices supervision.168 In central Asia and the Far East, Japan, Korea, Malaysia, Pak-istan, and Singapore are among the countries that have introduced unified finan-cial services supervision.169 In South America, a number of countries haveprudential and market conduct regulation under one roof.170 However, theGuatemalan, Venezuelan, Ecuadorian, Salvadoran, and Peruvian experienceshave shown that even where a financial services regulator is in principle unified,it has tended to operate out of silos, with very little integration in practice.171

In Hungary, the unified regulator has been operating for some time now and,like its Icelandic, Maltese, and UK counterparts, it is a fully unified regulator ofall financial institutions and markets. However, in Netherlands Antilles,Singapore, and Uruguay there is found a peculiar regulatory system where thecentral bank, not a separate regulatory agency, regulates securities firms andinsurance companies as well as banks.172

Taking all this worldwide experience into account, it appears that if a countryis to manage effectively the transition to a unified supervisory agency, a particu-larly important factor is the effective and efficient coordination of informationamong the major stakeholders, namely, the Ministry of Finance, the central bank,and the unified supervisory agency itself. Where there is an independent deposit

166 See id.167 See id.168 The twin peaks model emphasizes the objectives of regulation: systemic stability andconsumer protection. As Llewellyn observes: “The ‘twin peaks’ concept is based on a sin-gle prudential supervisory agency for all financial institutions (not only banks) and a singleconduct of business (consumer protection) agency.” See Llewellyn, supra n. 136, at xviii.169 E-mail from Jeffrey Carmichael, Chairman of the Australian Prudential RegulationAuthority, to K. K. Mwenda, the author (June 3, 2001) (copy on file with author).170 See id.171 See id.172 See Llewellyn, supra n. 136, at xvii.



insurance agency and an independent payments and settlements clearing agency,they, too, must be consulted. Such coordination provides a useful risk controlmechanism.

In a World Bank study, de Luna Martinez and Rose state that despite theintense debate on the advantages and disadvantages of integrated supervision, lit-tle is known about the experiences of countries that have adopted it and the obsta-cles and challenges they have faced in implementing it.173 In an endeavor torespond to this call, this chapter provides original data on the obstacles and chal-lenges faced by at least seven different countries—Latvia, the United Kingdom,Norway, Hungary, Korea, Jamaica, and Finland—in setting up unified regulators.The data confirms the thesis of this book, showing differences in the challengesfaced by different countries. Because of these differences, there is not much evi-dence to suggest that there are broadly accepted best practices in the structuralordering of unified financial services supervision.

In their attempt to shed more light on the topic of unified financial servicessupervision,174 de Luna Martinez and Rose present the results of a survey con-ducted in 15 countries that have adopted integrated supervision. They examine: (a)the reasons countries cited for establishing an integrated supervisory agency; (b)the scope of the regulatory and supervisory powers of these agencies; (c) theprogress these agencies had made in harmonizing their regulatory and supervisorypractices across the intermediaries they supervise; and (d) the practical problemspolicy makers faced in adopting integrated supervision.175 They conclude that:

The group of integrated supervisory agencies is not as homogeneous as itseems. Important differences arise with regard to the scope of regulatoryand supervisory powers the agencies have been given. In fact, contrary topopular belief, less than 50 percent of the agencies can be categorized asmega-supervisors. Another finding is that in most countries progresstoward the harmonization of prudential regulation and supervision acrossfinancial intermediaries remains limited. Interestingly, the survey revealedthat practically all countries believe they have achieved a higher degree ofharmonization in the regulation and supervision of banks and securitiescompanies than between banks and insurance firms.176

173 J. de Luna Martinez & T. A. Rose, International Survey of Integrated Financial SectorSupervision, Financial Sector Operations Policy Department, Policy Research WorkingPaper No. 3096, Abstract (World Bank 2003).174 See id.175 See id.176 See id.

The World Bank study identifies practical problems faced by the countries sur-veyed in establishing their unified agencies.177 A number of findings in the WorldBank study support the findings here178 that we have yet to see the evolution ofbest practices in the field of unified financial services supervision.

3.7 Conclusion

This chapter has examined the concept of a unified financial services regulator,highlighting approaches taken by different countries in structuring their unifiedagencies. It has made the argument that in countries where segments of the finan-cial sector are connected, there is a good case for establishing a unified regulator.In such countries, the nature of banking and financial services business is oftendeveloping to encompass more complex multifunctional operations.

It has been shown that, although unified financial services supervision hasbeen adopted in a number of countries, its application has varied from country tocountry and there is no single right way of introducing or implementing specificmodels of unified financial services supervision. Experience so far seems to sug-gest that, in order for a country to manage effectively the transition to a unifiedregulator, a crucial factor is the efficient sharing of information among the majoragency stakeholders in the supervisory system. Until there is a longer trackrecord of experience with unified agencies, it is difficult to come to firm conclu-sions about the restructuring process and the optimal internal structure of suchagencies.

177 See id.178 As presented, for example, in Table 3.1 above.





by Kishor Uprety










Publishers, Moscow








57

C H A P T E R 4

Frameworks for Unified Financial ServicesSupervision: Latvia, the ScandinavianCountries, and the United Kingdom

This chapter examines recent institutional and structural developments relating tounified financial services supervision in Latvia, the United Kingdom, and theScandinavian countries.179 After the concept of a unified regulator was intro-duced in Chapter 3, where approaches taken by different countries to structuringtheir unified regulators were examined, this chapter provides country studies ofunified regulators in Latvia, the Scandinavian countries, and the United King-dom.180 The intent here is to place in context the preceding discussions of legal,policy, conceptual, and theoretical issues that affect the efficacy of the regulatoryand institutional frameworks for financial services supervision. Similar studiesof such countries as Canada, Germany, Poland, Iceland, Hungary, Zambia, andthe Baltic States have already been undertaken.181

This chapter provides comparative perspectives on structural issues con-fronting financial services supervision in Latvia, the Scandinavian countries, andthe United Kingdom. It consolidates the arguments that there is no strong evi-dence of international best practices relating to the structure of unified regulatorsand that until there is a longer track record of experience with unified agencies,it is difficult to come to firm conclusions about the optimal structure of such

179 For some helpful background reading, see also: International Developments Parts Iand II, supra n. 1; and K. K. Mwenda, supra n. 1.180 An earlier version of this chapter, coauthored by K. K. Mwenda & Judith M. Mvula-Mwenda, was published as a refereed article in the Murdoch University Electronic Jour-nal of Law. See K. K. Mwenda & J. M. Mvula, Unified Financial Services Supervision inLatvia, the United Kingdom and Scandinavian Countries, 10(1) Murdoch U. ElectronicJ. L. (2003), http://www.murdoch.edu.au/elaw/issues/v10n1/mwenda101nf.html (accessedJanuary 7, 2004).181 See generally K. K. Mwenda, The Regulatory and Institutional Framework for UnifiedFinancial Services Supervision in the Baltic States, 9(2) J. East Eur. L. (2002); K. K.Mwenda, Unified Financial Services Supervision in Zambia: The Legal and InstitutionalFrameworks, 36 Zambia L. J. (2004); K. K. Mwenda, Legal Aspects of Unified FinancialServices Supervision in Germany, 4(10) Germ. L. J. (2003); K. K. Mwenda, supra n. 1;International Developments Parts I and II, supra n. 1; and K. K. Mwenda & J. M. Mvula,A Framework for Unified Financial Services Supervision: Lessons from Germany andOther European Countries, 5 J. Intl. Banking Reg. (2003).


agencies. As a general rule, there is no hard and fast way or rigidly fixed answerto how to structure a unified regulator. Different countries have taken differentroutes and approaches. The varied reasons for these differences may be ideolog-ical, historical, economic, or political, or a combination.

4.1 Some Preliminary Issues

Countries contemplating a reorganization of their financial regulatory structureare confronted by two fundamental questions:

1. Should some model of unified financial services supervision be followed?2. If unified financial services supervision were to be introduced, how should

it be done?

It is important that countries address these questions with reference to theirown economic, institutional, and political frameworks.182 In some instances,reorganization of the regulatory structure may be ill-advised, for example wherethere are more pressing financial and economic issues. There is a question, forinstance, as to whether countries facing imminent challenges in their financialsector, such as insolvencies among major banks, should be contemplatingwholesale reorganization of the regulatory function when it might deflect atten-tion away from the problems at hand.183 In other countries, because there arevery limited connections between the various segments of the financial sector(insurance, securities, pensions, and banking), maintaining the status quo maybe more appropriate in the short term. Other countries may simply not have

182 Taylor and Fleming state that “An important issue in deciding to adopt a unified super-visory agency is to consider whether it should be concerned exclusively with prudential[safety and soundness] regulation, or whether it should also have responsibility for con-duct of business. . . . Only the United Kingdom, of the countries surveyed, has created aunified regulator with both prudential and conduct of business responsibilities.” See supran. 133, at 2. Cf. Goodhart, et al., supra n. 135; Taylor, supra n. 135; Goodhart, supra n.135; and Briault, supra n. 133.183 Addressing recent developments in bank regulation, Llewellyn draws an analogy andargues: “The causes of systemic bank distress are complex and multi-dimensional involv-ing economic, financial, regulatory and structural weaknesses. This also means that reg-ulatory approaches also need to be multi-dimensional. . . . An optimum ‘regulatoryregime’ needs to incorporate seven key components: regulation (the rules imposed byofficial agencies), official supervision, incentive structures within banks, market disci-pline, intervention arrangements in the event of distress, corporate governance arrange-ments with banks, and the accountability of regulatory agencies. All are necessary butnone alone are sufficient for systemic stability. As there are trade-offs between the com-ponents, regulatory strategy needs to focus on the overall impact of the regime rather thanonly the regulation component.” See Llewellyn, supra n. 136, at Abstract.

Frameworks for Unified Financial Services Supervision 59

enough financial resources and well-trained human capital to implement unifiedfinancial services supervision.

Assuming a country chooses to restructure its regulatory organization, whatdoes the experience of other countries tell us about how unified financial ser-vices supervision should be introduced? The country studies set out below helpto shed light on these questions.

4.2 The Latvian Model

As the chapter examines institutional and structural aspects of unified financialservices supervision in Latvia, no attempt is made to delve into the policy foun-dation for introducing the model there. An insightful analysis of the reasons whymany countries, including Australia, have turned to unified financial servicessupervision is contained in a separate discussion.184

To meaningfully evaluate the efficacy of the framework for unified financialservices supervision in Latvia, it might be helpful first to examine some notableaspects of the Latvian financial, answering such questions as, how has the finan-cial sector performed and what is the aim of unified financial services supervi-sion in Latvia?

Generally, macroeconomic conditions in Latvia are favorable for a sustainedand balanced evolution of the financial sector.185 The country has been recover-ing steadily from the slowdown triggered by the Russian economic crisis. In2000, for example, the real gross domestic product (GDP) of Latvia grew byabout 6.5 percent, then in the first half of 2001 it grew by 8.75 percent. Thegrowth was spurred primarily by exports and investment, though manufacturing,forestry, and services also showed strong gains.186

Notwithstanding the recovery of the Latvian economy in general and thebanking system in particular, the latter remains susceptible to an array of poten-tial shocks,187 though as the IMF observes, none seem to pose significant risks.The most important stem from the rapid growth in lending and the associated

184 See International Developments Parts I and II, supra n. 1. See also K. K. Mwenda,supra n. 1.185 See IMF, The Republic of Latvia: Financial System Stability Assessment, IncludingReports on Observance of Standards and Codes on the Following Topics: BankingSupervision; Payments Systems; Securities Regulation; Insurance Regulation; CorporateGovernance; and Monetary and Financial Policy Transparency, IMF Country ReportNo. 02/67 (IMF 2002), http://www.imf.org/external/pubs/ft/scr/2002/cr0267.pdf (accessedMarch 31, 2003).186 See id. at 11.187 See id.


competition among banks; the perception of possible money laundering; apossible increase in domestic interest rates; and the potential for exchange ratemovements.188 It is such factors on which are based the policy considerations forstrengthening the structural framework for unified financial services supervi-sion in a country like Latvia.

A further source of vulnerability in the Latvian economy may be the large pro-portion of nonresident deposits in Latvian banks.189 The IMF estimates that in2001 these deposits accounted for about one-half of total deposits in the Latvianbanking system.190

About one-half of the non-resident deposits are from the U.S., reportedlyfrom Delaware-registered companies. Restrictive regulations in neighbor-ing CIS countries are a factor in the attractiveness of Latvian banks forthe non-resident businesses. Hence, there is a risk [that] both improvedregulations and increased financial confidence in these countries maylead to a deposit outflow from Latvia, which may hamper the businessprospects of those banks that are largely operating in CIS markets. Whilethese deposits are usually invested in highly liquid OECD paper or rede-posited abroad—with little maturity mismatch—the loss of this businesscould lead to a significant deterioration in profits, with possible systemicimplications.191

Latvia is now well advanced in the transition process and many of the eco-nomic and financial issues that it confronts are those typical of a small openeconomy.192 Further, most of the problems associated with the early stages oftransition—the prevalence of the state in banking business, the persistence ofstate enterprises as a source of inefficiency, bad loans, and a weak creditculture—no longer pertain to Latvia.193

Although a number of privatizations remain to be carried out in Latvia, theenterprise sector is in an advanced stage of restructuring and there is now a firmerfoundation on which to build the relationship of the regulator with the financialsector.194 The banking sector—the largest component of the financial systemof Latvia—has been greatly strengthened by the entry of foreign strategic

188 See id.189 See id.190 See id.191 See id.192 See id. at 4. 193 See id.194 See id.


investors.195 Moreover, Latvia conforms to a large extent with most of the BaselCommittee Core Principles for Effective Banking Supervision.196

Most of the insurance companies in Latvia are well capitalized and profitable.197

The total capital and surplus maintained by the industry as a whole is approxi-mately 3.5 times the amount required.198 An IMF study found all the insurancecompanies examined in Latvia to be in compliance with the minimum standards ofregulation.199 Further, the insurance regulatory body of Latvia had adopted the sol-vency margin formula prescribed for member countries of the European Union.The insurance market in Latvia is not so strongly connected with the banking sec-tor as to present a systemic risk to the financial system as a whole.

At present the few pension funds in Latvia do not represent a potential sourceof systemic risk either.200 The Latvian stock market is both small and illiquid, anddomestic institutional investors are only now beginning to emerge. Indeed, theabsence of a more active securities market limits the private sector’s borrowingoptions and concentrates funding risks within the banking sector.201

The structure of Latvia’s financial sector as at December 2000 is illustrated inTable 4.1.

Although the number of companies operating in the insurance market inLatvia fell from 42 in 1992 to 25, in 2000 (8 life insurance and 17 non-life com-panies), a requirement that the companies maintain higher levels of minimumcapital spurred consolidation.202 By the end of 2001, life insurance companieswere required to have at least LVL 2 million of base capital and non-life compa-nies at least LVL 1 million.203 The Insurance Supervision Inspectorate managedthe consolidation process in an orderly manner, and there were no insolvenciesthat caused losses for policyholders.204

Generally, the domestic financial markets of Latvia are thin.205 At the end of2000, for example, government securities outstanding totaled LVL 226 million

195 See id. 196 See id. at 20.197 See id. at 17.198 See id.199 See id.200 See id.201 See id.202 See IMF, supra n. 185, at p. 8. 203 See id. at 8.204 See id.205 However, the shallow domestic Lat market is balanced by the ability of banks inLatvia to access the Bank of Latvia’s lending facilities. While the interbank market isthe primary means of satisfying day-to-day liquidity needs, the Bank of Latvia providesbackup liquidity support.


(about 5.25 percent of GDP).207 The interbank market is also shallow, beingconcentrated in about five banks, one of which accounts for 25 to 30 percent ofthe market—a large enough position to move the market on its own.208

The interbank market for foreign exchange is significantly deeper, and thus:

Commercial banks have access to lines of credit abroad, as approximately70 percent of bank capital is foreign-owned. A result of these thin marketsis volatility in money market interest rates. Commercial banks’ liquidityforecasting is short-term with forecasts typically made for 3 to 6-monthperiods.209

TABLE 4.1

Latvia: Structure of the Financial System at End-2000

Assets

(millions of (percent of Financial Institutions Number Lats-LVL) GDP)

Banks 21 2,485 57.4

Credit unions 17 1 —

Insurance companies 25 115 2.7

Brokers 22 — —

Pension funds 4 6 0.1

Investment funds 3 — —

Leasing companies 206 5 140 3.2

Source: Bank of Latvia, Insurance Supervision Inspectorate, and Securities Market Commis-sion, as quoted in IMF, The Republic of Latvia: Financial System Stability Assessment,Including Reports on Observance of Standards and Codes on the following topics: BankingSupervision; Payments Systems; Securities Regulation; Insurance Regulation; CorporateGovernance; and Monetary and Financial Policy Transparency, IMF Country ReportNo. 02/67, (IMF 2002), http://www.imf.org/external/pubs/ft/scr/2002/cr0267.pdf.

206 Of the five companies that undertake the bulk of leasing, three are subsidiaries of Lat-vian banks. Their assets are deduced from banks’ assets (first row of the table). In addi-tion, four banks undertake leasing activities in the order of Lat 85 million directly. 207 See IMF, supra n. 185, at 9.208 See id. at 9.209 See id.


Today, the responsibility of supervising the financial sector in Latvia is vestedin a unified financial services regulatory agency. The Financial and Capital Mar-ket Commission of Latvia started operating on July 1, 2001, in accordance withthe Law on the Financial and Capital Market Commission adopted by the Latvianparliament in June 2000.210 The Bank of Latvia observes:

The experience of the Scandinavian countries has shown that as a financialmarket develops and its range of services provided expands, mergingseveral financial supervisory authorities into one provides for more effi-cient supervision of the transactions in the financial sector, includingan opportunity to assess market conditions more objectively and duly iden-tify risk factors that could affect the interests of market participants andclients. . . . A unitary system for supervision of capital market has beensuccessful in the Scandinavian countries, Australia, Canada, Japan, Korea,Singapore and Great Britain. Of the Central and East European countries,it has already been introduced in Hungary, and. . . Estonia.211

There has been a smooth transition from the Latvian supervisory agenciesthat separately regulated banking, securities, and insurance activities to a sin-gle unified regulatory body. The Financial and Capital Market Commission ofLatvia merged the operations of the Banking Supervision Department of theBank of Latvia, the Insurance Supervision Inspectorate in the Ministry ofFinance, and the Securities Market Commission. The creation of a unified reg-ulator was intended to enhance the stability and safety of the financial marketsin Latvia.212

4.3 Structure of the Financial and Capital Market Commission

The Financial and Capital Market Commission (the Commission) in Latvia isorganized mainly along functional lines rather than on a silos approach. The leaddepartments of the Commission focus on such functions as supervision andlicensing, irrespective of the type of financial intermediary, institution, orbusiness activity being supervised. Figure 4.1 illustrates the structure of the Com-mission.

210 See Bank of Latvia, On Establishing the Financial and Capital Market Commission inLatvia, May 22, 2001, http://www.bank.lv/eng/main/sapinfo/lbpdip/index.php?30816&PHPSESSID=4560d09b0de5f4b291ea190bbc69477a (accessed February 18,2003), copy on file with author. 211 See id.212 See IMF, supra n. 185, at 19.


The Commission has a staff of more than 90 people.213 It has taken over fromthe Bank of Latvia the responsibility of supervising credit institutions, as well asthe responsibilities previously held by the Deposit Insurance Guarantee Admin-istration, the State Insurance Supervisory Inspectorate, and the Securities MarketCommission.214

FCMC

Chairman

Deputy Chairman

Information Technologies Department Public Relations Department

Accounting Department

General Service Department

Internal Auditor

Personnel Department

Record Keeping Department

RegulatoryRequirements and

Statistics Department

Bankingand Securities

Market Division

InsuranceDivision

LegalDivision

LicencingDivision

RegulatoryRequirements

Division

Statisticsand Analyses

Division

SupervisionDepartment

Legal andLicencing

Department

Figure 4.1. Structure of the Financial and Capital Market Commission

Source: Financial and Capital Market Commission Web site:http://www.fktk.lv/fcmc/structure/ (accessed February 18, 2003).

213 A. Vanags, Latvia’s New Super-Regulators Have a Mission, Transition Newsletter,http://www.worldbank.org/transitionnewsletter/octnovdec01/pgs35-36.htm (accessedFebruary 18, 2003).214 See id.


4.3.1 Functions of the Commission

The Commission has the following functions:

1. To issue binding regulations and directives setting out requirements for thefunctioning of financial and capital market participants and the calculationand reporting of their performance indicators;

2. By controlling compliance with regulatory requirements and directivesissued by the Commission, to regulate activities of financial and capitalmarket participants; and

3. To specify qualification and conformity requirements for financial andcapital market participants and their officials.215

The Commission is also responsible for establishing procedures for

• Licensing and registering financial and capital market participants• Collecting, analyzing, and publishing information relating to the financial

and capital market• Ensuring accumulation of funds in the Deposit Guarantee Fund and the

Protection Fund for the Insured• Management and payment of compensation from the two Funds in accor-

dance with the Laws on Deposits of Individuals and the Insurance Compa-nies and their Supervision

• Analyzing regulatory requirements pertaining to the financial and capitalmarket and drafting proposals for their improvement and harmonizationwith requirements of the European Union

• Engaging in systemic study, analysis, and forecasting of development of thefinancial and capital market

• Cooperating with foreign financial and capital market supervision authori-ties, and participating in relevant international organizations.216

In undertaking its functions related to financial and capital markets, the Com-mission can

• Issue regulations and directives governing activities of market participants• Request and receive information necessary for the execution of its func-

tions from participants

215 The Law on the Financial and Capital Market Commission 2000, art. 6.216 See id.


• In certain types of cases, restrict the activities of market participants• Verify compliance of market participants with legislation and the regula-

tions and directives of the Commission • Apply sanctions set forth when market participants (and their officials)

have violated Commission requirements• Participate in general meetings of market participants, convene meetings

of market participant management bodies, and specify items for theiragenda

• Request and receive free of charge, from the Commercial Register andother public institutions, any information it needs to execute its functions

• Cooperate with foreign financial and capital market supervision authoritiesand exchange information necessary to execute the functions specifiedby law.217

The Commission can also carry out other activities permitted under normativeacts (subsidiary legislation) as part of the process of executing its statutory func-tions.218 The regulations and directives issued by the Commission are binding onparticipants in the financial and capital markets.219

4.3.2 How the Commission Relates to Other Agencies

Under the Law on the Financial and Capital Market Commission 2000, theCommission and the central Bank of Latvia are required to share statistics rel-evant to the execution of their tasks,220 but there is no equivalent requirementfor the Commission and the Ministry of Finance to share information.221 Nev-ertheless, at least once every quarter, the Commission is required to submit tothe Bank of Latvia and the Ministry of Finance information summarizing thesituation in the financial and capital market.222 The Commission must alsoinform the Governor of the Bank of Latvia and the Minister of Finance, in

217 See id. art. 7(1).218 See id. art. 7(2).219 See id. art. 8.220 See id. art. 10(3).221 In other countries, such as the United Kingdom and Hungary, the sharing of infor-mation between the unified regulator and other stakeholders in the financial system,such as the central bank, is facilitated by a Memorandum of Understanding. Generally, aMemorandum of Understanding, unlike a piece of legislation, is what some jurisprudentscall “soft law.” 222 The Law on the Financial and Capital Market Commission 2000, art. 10(1).


writing, about the short-term liquidity problems of any market participant orany potential or actual insolvency of a market participant.223 The CommissionLaw specifies that:

Article 11. The Commission shall provide information on the financialstatus of specific credit institutions upon a written request of the Governorof the Bank of Latvia. Article 12. If not otherwise specified by regulatory requirements, the infor-mation referred to in this Section shall be considered restricted.

The Commission can also request that the Bank of Latvia extend a loan againstcollateral to any such institution.224

4.3.3 Management of the Commission

A five-member Council governs the Commission.225 The members are theChairperson; the Deputy-Chairperson; and three directors of Commissiondepartments.226 The Chairperson represents the Commission in its relations withstate institutions, financial and capital market participants, and internationalorganizations.227

Parliament appoints both the Chairperson and the Deputy for terms of sixyears each, based on a joint recommendation of the Minister of Finance and theGovernor of the Bank of Latvia.228 The Chairperson, in coordination with theMinister of Finance and the Governor of the Bank of Latvia, can appoint andremove other members of the Council.229 Persons appointed to the Council, offi-cers or not, must be competent in financial management and of good repute.230

An appointee must also have at least five years experience in the Latvian finan-cial and capital market.231

No person can be appointed who has a record of committing a “deliberate”criminal offense (whether the criminal record has been annulled or removed) or

223 See id. art. 10(2).224 See id.225 See id. arts. 13(1) and (2). This 2000 law repealed the Latvian Law on Securities Mar-ket Commission (Zinotajs of the Parliament of the Republic of Latvia and the Cabinet ofMinisters, 1995, No. 20; 1997, No. 14; 1998, No. 23).226 See id. art. 13(2).227 See id. art. 18(3).228 See id. art. 13(3).229 See id. art. 13(4).230 See id. art. 13(5).231 See id.


has been deprived of the right to engage in any type of “entrepreneurial activ-ity.”232 The Commission Law does not, however, spell out what constitutes a“deliberate” offense; nor does it define “entrepreneurial activity.” What is clear,though, is that Parliament can only dismiss the Chairperson or the Deputy Chair-person before term-end if:

1. The person has submitted an application to resign;2. The person has been convicted of a criminal offense;3. The person is not able to officiate for a period of six consecutive months

due to illness or for any other reason; or 4. The Governor of the Bank of Latvia and the Minister of Finance have

jointly submitted an application for early dismissal.233

However, it is not clear what the statutory grounds are for the Chairperson toremove other members from the Council; the Commission Law is silent on this.Also, while the law provides that the Chairperson of the Commission has powerto hire and dismiss Commission staff,234 it does not state the reasoning uponwhich such a decision is to be made. It is also not clear whether the CommissionLaw provides immunity to members and staff of the Commission from liabilityfor acts or omissions done in good faith and in the course of business.

4.3.4 Meetings of the Council

Meetings of the Council are convened and presided over by the Chairperson ofthe Council or, during his or her absence, the Deputy Chairperson.235 The quo-rum for a competent meeting is four members.236

Each member of the Council has the right to call a meeting of the Council bysubmitting a written application.237 Meetings can be convened as needed,although they should not be held less often than once a month.238

The Council has power to pass resolutions by a simple majority. In cases of tievotes, the vote of the person chairing the meeting is decisive.239 The Governor or

232 See id. art. 13(6).233 See id. art. 14.234 See id. art. 18(2).235 See id. art. 15(1).236 See id. art. 15(2).237 See id. art. 15(3).238 See id. art. 15(4).239 See id. art. 16(1).


Deputy Governor of the Central Bank of Latvia and the Minister of Finance mayparticipate in Council meetings as advisors.240 Heads of the public organizations(professional associations) of financial and capital market participants may sim-ilarly take part in Council meetings, provided that the meetings have not beendeclared closed by resolution of the Council.241 All members attending a Councilmeeting must sign its minutes.242 The individual opinion of a member attendinga Council meeting who votes against a resolution that passes is to be recordedin the minutes; that member will not be held responsible for the resolution ofthe Council.243

4.3.5 Powers of the Council

The Council of the Financial and Capital Market Commission has exclusiverights to:

• Approve supervisory and regulatory policies for the market• Issue binding regulations and directives regulating the activities of market

participants• Issue special permits (licenses) or certificates authorizing operation in the

market• Suspend or renew the validity of the special permits (licenses) or certifi-

cates issued• Annul any special permit (license) or certificate issued• Decide on the application of sanctions against persons in breach of any of

the requirements pertaining to the market.244

The Council may also:

• Specify fees to be paid by financial and capital market participants tofinance activities of the Commission

• Approve the structure of the Commission and its structural units • Approve the annual budget of the Commission• Set compensation for Commission staff• Approve the Commission’s performance and annual report

240 See id. art. 16(2).241 See id.242 See id. art. 16(3).243 See id. art. 16(4).244 See id. art. 17.


• Approve procedures for registration, processing, storage, distribution, andliquidation of information at the disposal of the Commission

• Pass resolutions on and sign cooperation agreements with the Bank ofLatvia and foreign financial supervision authorities on the exchange ofinformation necessary for supervision and regulation of the financial andcapital market.245

4.3.6 The Consultative Council

A Consultative Council of the Financial and Capital Market Commission can beset up to promote efficiency in monitoring the financial and capital market andto promote the safety, stability, and growth of the market.246 The ConsultativeCouncil would comprise representatives of the Commission and heads of thepublic organizations (professional associations) of financial and capital marketparticipants.247 Representation of public organizations is to be done on the prin-ciple of parity.

The Consultative Council is deemed competent to conduct business if at leasthalf of its members are present at a meeting.248 It can pass a resolution by a sim-ple majority vote of the members present. In the case of a tie vote, the resolutionis considered not to have passed.

Meetings of the Consultative Council are presided over by the Chairperson orDeputy Chairperson of the Commission.249 The Commission is responsible forkeeping a record of the deliberations of the Consultative Council, which isexpected to be a collegial, advisory body, dealing with the following tasks:

• Reviewing legislation drafted for the regulation of the activities of partici-pants in the financial and capital market

• At the request of a market participant and before consideration by the Com-mission, review the participant’s complaints about the findings of a Com-mission inspection

• Prepare policy recommendations for the Council relevant to the executionof the Commission’s statutory functions, and to improvement of the regula-tion and monitoring of the financial and capital market.250

245 See id. 246 See id. art. 21(1).247 See id. art. 21.248 See id.249 See id.250 See id. art. 21(1).


The Consultative Council is also responsible for issuing an opinion on theCommission’s annual budget, submitting proposals to the Chairperson of theCommission regarding improvement of the Commission’s activities, and super-vising the accrual of funds with the Deposits Guarantee Fund and the Fund forthe Protection of the Insured and the disbursement of compensation paymentsfrom these Funds. 251

4.4 Strategic Goals of the Commission

The main strategic goal of the Commission is to ensure that there is overall sta-bility in the financial and capital market of Latvia.252 To achieve this stability, theCommission has promulgated the following objectives:

“1.1. Promotion of overall trust in the Latvian financial system. Currentlythe level of trust of the Latvian population in the financial and capital mar-ket is lower than the level achieved in the European Union (hereinafter, theEU). The Commission will focus its efforts on increasing the trust in theparticipants of the financial and capital market to the extent that the trustreaches or exceeds the level of trust observed in EU member countries.

“1.2. Surveillance of risks of the Latvian financial system. As the main goalof the Commission is to promote the stability in the financial and capitalmarket, the Commission will devote a greater attention to the surveillanceof risks faced by the market participants.253

The Commission postulates further:

“1.3. Minimisation of potential losses. One of the tasks of the Commissionis to follow whether the market participants are able to meet their liabilities.The solvency of the market participants depends on economic and otherfactors. The [consultative] council, the board, and the largest shareholdersof each market participant are responsible for the financial stability andactivities of their firm in the market. Full responsibility is also born by thecustomers who are competent in financial issues, for instance, large enter-prises and institutional investors. In order to minimise the risk of insol-vency of market participants, the Commission will monitor the compliancewith the requirements of minimum capital and capital adequacy, follow theactivities of market participants, and will develop appropriate methodologyfor assessing the financial standing of market participants. The activities of

251 See id.252 See also Financial and Capital Market Commission, at: http://www.latvianbanks.com/banks/Financial_and_Capital_Market_Commission.htm (accessed February 18, 2004).253 See id.


the Commission are aimed to minimize [sic] the impact of potential insol-vency of certain market participants on customers’ trust in the financialsystem of the country in general.”254

The Commission has observed that among its objectives are (a) to reducethe possibilities that criminals will use the Latvian financial system to launderthe proceeds of criminal activities; (b) to promote the security of informationtechnologies; and (c) to promote the cost-effectiveness of the Commission’sactivities.255

Recognizing the necessity to ensure the quality of its supervision of the finan-cial and capital market, the Commission also takes into account interests of par-ticipants in the financial and capital market in allocation of its financial resources.The Commission discourages the incurring of expenses not related to its tasks.256

Closely related to the objectives of the Commission are its strategic goals,which are to promote stability in the financial and capital market; promote devel-opment of the financial and capital market; and protect the interests of investors,depositors, and the insured.257

Apart from conducting prudential regulation and supervision, the Commis-sion is expected also to strengthen public confidence and trust in the Latvianfinancial system.258 Presently, the Latvian public has less trust than is generallytrue in EU members because there is a public perception that money is beinglaundered in Latvia.

The Commission is charged with fighting money laundering, promoting com-petition, and promoting public awareness of financial services and products,among a host of other tasks.259 To promote the development of the financial sec-tor, the Commission has promulgated three objectives:

1. Promotion of free competition in the financial and capital market 2. Promotion of financial innovations3. Analysis and development of a viable taxation system.260

These objectives guide the Commission in its daily functions. The Com-mission maintains that development of the financial sector in Latvia should be

254 See id.255 See id.256 See id.257 See id. See also Law on the Financial and Capital Market Commission 2000, art. 5. 258 Vanags, supra n. 213.259 See id. See also Law on the Financial and Capital Market Commission 2000, art. 9. 260 See supra n. 252.


supported by implementation of international accounting standards and thecooperation of the Commission with professional associations of market partic-ipants.261 On the protection of interests of investors, depositors, and the insured,the Commission observes that it will “follow whether the participants of thefinancial and capital market provide to the customers of the financial andcapital market highly qualitative . . . service corresponding to the norms of busi-ness ethics.”262

4.5 Other Aspects of the Regulatory Framework

The Commission enjoys full rights as an independent and autonomous publicinstitution.263 Annually by July 1 it files with the Parliament of Latvia a writtenreport on its performance in the preceding year, with complete audited financialstatements.264 For purposes of its responsibility of regulating and monitoring theactivities of market participants,265 Article 4 of the Commission Law defines“participants” in the financial and capital markets as “issuers, investors, creditinstitutions, insurers, private pension funds, insurance brokers, stock exchanges,depositories, broker companies, brokers, investment companies and investmentconsultants.”

Though the Commission is required to make independent decisions within thelimits of its authority, it is not clear whether its decisions can be challenged in acourt of law on the grounds that the decision was not made independently.

The Commission is entrusted with powers to execute functions assigned to itby law and is responsible for the execution of these functions.266 The CommissionLaw prohibits any interference with activities of the Commission, except by aninstitution or official authorized by law to intervene.267 The 2000 statute is, how-ever, not clear on the type of penalty that would be meted out to a party acting inbreach of this prohibition.

4.5.1 Assets of the Commission

Pursuant to Article 3(1) of the Commission Law, the Commission is entitled to beassigned property owned by the state. It must also have an independent balance

261 See id.262 See id.263 The Law on the Financial and Capital Market Commission 2000, art. 2(1).264 See id. art. 27.265 See id. art. 2(1). 266 See id. art. 2(2).267 See id.


sheet. The Commission has a seal bearing its full name, is endowed with othercorporate requisites, and has an account with the Bank of Latvia.268

4.5.2 Financing of the Commission

Activities of the Commission are financed by payments of participants in thefinancial and capital market in amounts specified by the Council of the Commis-sion; these may not exceed amounts set by law.269 This rule helps to promote theindependence and autonomy of the Commission. Indeed, in many cases where aregulatory body is funded from the central government budget, its functional andoperational autonomy is compromised. There is also the likelihood that the regu-latory body will not have adequate political independence to carry out its dutieseffectively, given the weight of interference from the executive arm of the State.

We now examine developments relating to unified financial services supervi-sion in the Scandinavian countries.

4.6 Unified Financial Services Supervision in the Scandinavian Countries

There is some variation among the models of financial services supervision pro-vided by Scandinavian countries.

4.6.1 Norway

Norway was the first to move to a model for unified financial supervision.270 In1986, after a long process of consolidating its regulatory system, Norwaymerged its Banking and Insurance Inspectorates.271 This development followedan experience of:

having been influenced by broadly similar considerations in making themove toward an integrated approach to regulation and having reaped manyof the same benefits from this approach. Chief among these benefits hasbeen obtaining economies of scale in the use of scarce regulatory resourcesin comparatively small, highly concentrated financial systems in whichfinancial conglomerate groups predominate. [footnote omitted]

. . .

268 See id. art. 3(2).269 See id. art. 22(1).270 Mwenda, supra n. 72, at 113.271 See id.


[Norway’s] Bank Inspectorate could trace its history back to the end of thelast century, when it was established for the supervision of savings banks.The supervision of commercial banks was added to its responsibilities inthe 1920’s. Banking supervision has thus never been formally part of theresponsibilities of the Norwegian central bank, and hence the creation ofa unified regulatory authority did not involve any significant dilution ofthe central bank’s range of powers. Indeed, a proposal in 1974 for themerger of the bank inspectorate with the central bank was defeated in par-liament. In 1983 the Banking Inspectorate further acquired some of thefunctions of the securities bureau of the Ministry of Finance.272

While the Ministry of Finance continued to be responsible for regulating theOslo Stock Exchange,273 the Banking Inspectorate was entrusted with powers toundertake prudential supervision of specialist securities firms and investmentmanagement firms.274 Given that banks in Norway were already the most activeparticipants in the securities markets, placing supervision of nonbank securitiesfirms under the Bank Inspectorate was a natural extension of its role in oversee-ing nonbank securities activities.275

Since 1986 Norway’s single regulatory agency, the Kredittilsynet, has regulatedbanks, nonbank investment firms, and insurance companies, giving primary atten-tion to their solvency.276 However, although the Norwegian regulatory agency is alsoresponsible for regulating real estate brokers and auditing firms, it had by Novem-ber 1999 still not been granted the formal authority to supervise the Oslo StockExchange.277 The enactment if Norway’s Stock Exchange Act on November 17,2000, gave the Kredittilsynet the power to supervise the Oslo Stock Exchange.278

On the other hand, section 1 of the Financial Supervision Act, No. 1 of 7December 1956, regulating the supervision of Norwegian credit institutions,

272 Taylor & Fleming, supra n. 133, at 4–5.273 This is the only organized financial market in Norway.274 Taylor & Fleming, supra n. 133, at 5.275 See id.276 See id.277 See id.278 See Guidelines for Co-operation between Oslo Exchanges and the Bank, Insuranceand Securities Commission, March/April 2001, at 3, available at http://gammel.ose.no/pdf/guidelines.pdf. See also, Norway’s Stock Exchange Act 2000, section 8-1, deal-ing with “Supervisory Authority.” Although the Oslo Stock Exchange is by lawsupervised by the Kredittilsynet, it is the Ministry of Finance that has statutory power,under section 2-1 of the Stock Exchange Act 2000, to authorize and license a stockmarket in Norway. Thus, in essence, the Act vests supervision of the Oslo StockExchange in an authority other than that charged with responsibility for licensing thestock exchange.


insurance companies, and securities trading, states, with numerous crossrefer-ences to other statutes, that it deals with the supervision of

• commercial banks• savings banks• non-life insurance companies, including the general agents (principal

agents) in Norway of foreign nonlife insurance companies• life insurance companies, including principal agents of foreign companies• branches of credit institutions, insofar as their activities in Norway are

concerned• finance companies and mortgage companies• any person who is required, under the Financial Institutions Act, to notify

the Kredittilsynet of organized or commercial intermediation of loans• any undertaking falling within certain sections of the Financial Institutions

Act or which the King excepts from any of the provisions of that Act whenit is decided that the Kredittilsynet shall supervise the business

• auditors and firms of auditors approved under the Auditors Act• maritime insurance associations• representative offices in Norway of foreign financial institutions• investment firms and other undertakings carrying on business connected

with securities trading• private, municipal, and county municipal pension funds• other undertakings that may be specified by law.

A Board of five members manages the Kredittilsynet.279 The King appointsmembers and deputy members of the Board;280 its chairman and vice chair-man;281 and the director-general of the Kredittilsynet, who serves a six–yearterm.282 The members and deputy members of the Board are appointed forfour–year terms.283 The King has powers to lay down instructions for theBoard,284 so it is not clear how much political independence and functional andoperational autonomy the Kredittilsynet enjoys.

Two members are elected by and from among the employees to supplement theBoard when it deals with administrative business.285 The election arrangement is

279 Norway’s Financial Supervision Act 1956, sec. 2. 280 See id.281 See id.282 See id.283 See id.284 See id.285 See id.


agreed upon by negotiation with the employees; if agreement cannot be reached,an arrangement is stipulated by the Ministry.286 The Norges Bank has an observeron the Board who is entitled to speak and to submit proposals, but not to vote.The Ministry appoints the observer and a deputy for a period of four years, fol-lowing a proposal from the Norges Bank.287

4.6.2 Sweden and Denmark

In Sweden, the Finansinspektionen, which is the institution charged with unifiedfinancial supervision, was set up in 1991.288 As the Finansinspektionen observes:

The Swedish Financial Supervisory Authority, Finansinspektionen, is apublic authority. Our role is to promote stability and efficiency in thefinancial system as well as to ensure an effective consumer protection. Weauthorize, supervise and monitor all companies operating in Swedishfinancial markets. The Finansinspektionen is accountable to the Ministryof Finance.289

The Finansinspektionen monitors and analyzes trends in the financialmarket.290 It assesses the financial health of individual companies, the varioussectors, and the financial market as a whole.291 Furthermore, the Finansinspek-tionen examines risks and control systems in financial companies and supervisescompliance with statutes, ordinances, and other regulations.

In Sweden, business operations that offer financial services require a permitfrom the Finansinspektionen.292 This unified regulatory body also issues regula-tions and general guidelines and assesses whether current legislation needs to beamended. It supervises compliance with the Swedish Insider Dealing Act andinvestigates suspected offenses and share price manipulations.293 The Finansin-spektionen also works to ensure that companies disclose complete and accurateinformation to their customers. Finally, the agency prepares rules for financialreporting by financial companies.294

286 See id.287 See id.288 Taylor & Fleming, supra n. 133, at 7.289 Finansinspektionen (FI, the Swedish unified regulator), http://www.fi.se/Templates/StartSectionPage____842.aspx (accessed July 13, 2004).290 See id.291 See id.292 See id.293 See id.294 See id.


The Swedish Finansinspektionen’s counterpart in Denmark, the Finanstil-synet, was established pursuant to a merger of banking and insurance regulatoryagencies in 1988.295 Section 3(2) of the Danish Financial Business Act 2001296

provides that the Danish Financial Supervisory Authority may lay down rules andguidelines on honest business principles and good practices. Where the rules andguidelines involve marketing and competition, the Danish Financial SupervisoryAuthority will carry out negotiations with the Danish Consumer Ombudsmanand the Competition Authority of Denmark.

The responsibilities of both the Swedish and Danish regulatory bodies are sim-ilar to those of the Norwegian Kredittilsynet. In Denmark, as in Norway, thebanking supervisory authority had enjoyed a long history as an agency outsidethe central bank and the prudential supervision of nonbank securities firms was

295 Taylor & Fleming, supra n. 133, at 6.296 This statute implements Council Directive 86/635/EEC of 8 December 1986 on theannual accounts and consolidated accounts of banks and other financial institutions, OJL 372, 31.12.1986, p. 1; Council Directive 90/618/EEC of 8 November 1990 amending,particularly as regards motor vehicle liability insurance, Directive 73/239/EEC andDirective 88/357/EEC, which concern the coordination of laws, regulations, and admini-strative provisions relating to direct insurance other than life assurance, OJ L 330,29.11.1990, p. 44; Council Directive 90/619/EEC of 8 November 1990 on the coordina-tion of laws, regulations, and administrative provisions relating to direct life assurance,laying down provisions to facilitate the effective exercise of freedom to provide servicesand amends Directive 79/267/EEC, OJ L 330, 29.11.1990, p. 50; Council Directive91/674/EEC of 19 December 1991 on the annual accounts and consolidated accountsof insurance undertakings, OJ L 374, 31.12.1991, p. 7; Council Directive 92/49/EEC of18 June 1992 on the coordination of laws, regulations, and administrative provisionsrelating to direct insurance other than life assurance and amending Directives73/239/EEC and 88/357/EEC (third non-life insurance Directive), OJ L 228, 11.08.1992,p. 1; Council Directive 92/96/EEC of 10 November 1992 on the coordination of laws,regulations, and administrative provisions relating to direct life assurance and amendingDirectives 79/267/EEC and 90/619/EEC (third life assurance Directive), OJ L 360,09.12.1992, p. 1; Council Directive 93/22/EEC of 10 May 1993 on investment servicesin the securities field, OJ L 141, 11.06.1993, p. 27; European Parliament and CouncilDirective 95/26/EC of 29 June 1995 amending Directives 77/780/EEC and 89/646/EECin the field of credit institutions, Directives 73/239/EEC and 92/49/EEC in the field ofnon-life insurance, Directives 79/267/EEC and 92/96/EEC in the field of life assurance,Directive 93/22/EEC in the field of investment firms, and Directive 85/611/EEC in thefield of undertakings for collective investment in transferable securities (Ucits), with aview to reinforcing prudential supervision, OJ L 168, 18.07.1995, p. 7; Directive98/78/EC of the European Parliament and of the Council of 27 October 1998 on thesupplementary supervision of insurance undertakings in an insurance group, OJ L 330,05.12.1998, p. 1; Directive 2000/12/EC of the European Parliament and of the Council of20 March 2000 relating to the taking up and pursuit of the business of credit institutions,OJ L 126, 26.05.2000, p. 1; and Directive 2000/64/EC of the European Parliament and ofthe Council of 7 November 2000 amending Council Directives 85/611/EEC, 92/49/EEC,92/96/EEC and 93/22/EEC as regard exchange of information with third countries, OJ L290, 17.11.2000, p. 27.


part of its responsibilities before a fully unified agency was created.297 However,the creation of the Danish framework for unified financial supervision was“largely an administrative arrangement, and there was no fundamental review oflegislation governing its supervisory activities at the time of the merger.”298 Forthis reason, the Danish unified regulatory body operates under a number of dif-ferent statutes inherited from predecessor organizations.299 Although Denmarkmade efforts to harmonize its legislation in the 1990s, governance of the Danishregulatory body has not been fully unified.300

In Sweden, the creation of the Finansinspektionen was prompted by the bank-ing crisis that hit Sweden in 1990–91.301 There was also a political desire to keepup with other Scandinavian countries that had already established a frameworkfor unified financial supervision.302 In addition, and apart from the fact that Swe-den, unlike Norway and Denmark, is a member of the Basel Committee on Bank-ing Supervision and thus more likely to be attracted to achieving economies ofscale and enhancing its international presence, there is also a long history ofenhanced links between the banking and insurance sectors in Sweden.303

By contrast, Finland has opted not to adopt a fully unified approach to finan-cial supervision, though until the late 1980s the Finnish regulatory frameworkmirrored that of Norway, Denmark, and Sweden.304 A number of institutionalchanges that were introduced to the Finnish system focused mainly on enhancingthe link between banking supervisors and the Bank of Finland.305

It is against this background that the Finnish FSA was established. Section 1 ofthe Finnish Financial Supervision Authority Act 1993 provides that the Finnish FSA,

297 See Taylor & Fleming, supra n. 133, at 6.298 See id.299 See id. For relevant Danish legislation, see for example the Consolidated InsuranceMediation Act, 2001; the Consolidated Insurance Business Act, 2002; the InvestmentCompanies Consolidated Act, 2000; the Commercial Banks and Savings Banks, etc. Con-solidated Act, 2001; the Mortgage Credit Act, 2001; the Danish Supervision of CompanyPension Funds Act, 1999; and the Consolidated Act on Measures to Prevent MoneyLaundering and Financing of Terrorism, 2002.300 See Taylor & Fleming, supra n. 133, at 6.301 See id. at 7. See also generally Drees & Pazarbasioglu, supra n. 136, where it is arguedthat although the banking crises in Norway, Sweden, and Finland in the early 1990s fol-lowed a similar pattern and appear to have had similar causes, the impact on the structureof regulation differed significantly between Norway and Sweden, on the one hand, andFinland, on the other. 302 See Taylor & Fleming, supra n. 133, at 7.303 See id.304 See id.305 See id. at 8.


operating in connection with the Bank of Finland, has powers to supervise finan-cial markets and “entities” operating in the market. Separate statutory provisionsapply to the supervision of insurance and pension institutions.306

Under section 2 of the act, “supervised entities” are

• credit institutions (cf. Credit Institutions Act)• guarantee funds of a deposit bank; a deposit guarantee fund (Credit Institu-

tions Act, chapter 6a)• branches of a foreign credit institution• representative offices of a foreign credit institution• management companies and custodians• investment firms• investor compensation funds as referred to in the Investment Firms Act • branches and representatives office of foreign investment firms• stock exchanges• options corporations • market makers, as referred to in chapter 1, section 4 of the Act on Trading

in Standardized Options and Futures• clearing corporations and clearing parties• central securities depositories, the fund of a central securities depository

and the clearing fund of a central securities depository• authorized book-entry registrars• pawnshops• cooperative societies as referred to in section 41a of the Cooperative Banks

Act (1126/93)• any amalgamation and central body of the cooperative banks, as referred to

in section 7a of the Cooperative Banks Act• holding corporations of a credit institution and an investment firm • corporations holding a controlling interest in a stock exchange, options cor-

poration, clearing corporation, or a central securities depository as referredto in chapter 1, section 5, of the Securities Markets Act

• holding companies of a financial conglomerate, as referred to in the Act onthe Supervision of Financial Conglomerates, where the Finnish FSA is thecoordinating supervisory authority of the financial conglomerate.

The Finnish FSA works closely with the Finnish Insurance SupervisionAuthority and other agencies that supervise financial markets.307Although admin-istratively connected to the Bank of Finland, the Finnish FSA is independent in its

306 Financial Supervision Authority Act, 1993, of Finland, sec. 1. 307 See id. sec. 4(6).


decision making.308 Nevertheless, the political independence of the Finish FSAremains to be seen, especially since the President of the Republic of Finlandappoints the FSA director-general,309 and members of the Parliamentary Supervi-sory Council have administrative duties to (a) appoint three members of the FSABoard and their personal deputies for three years at a time, on the basis of propos-als by the Bank of Finland, the competent Ministry, and the Ministry responsiblefor insurance business; (b) appoint the chairman and the deputy chairman of theBoard, and, on the basis of a proposal by the Board, a deputy to the director-gen-eral; (c) decide upon bases for setting the director-general’s salary, leave ofabsence, and annual leave; (d) decide upon reprimanding the director-general andon other matters related to the employment relationship; and (e) confirm FSArules of procedure on the basis of a proposal by the Board.310

Contrasting the model for unified financial supervision in many Scandinaviancountries with that in the UK, it can be argued:

For different reasons, the United Kingdom’s adoption of unified regulationstands out as something of an exception among northern European coun-tries. Unlike the Scandinavian countries, the UK is home to an internationalfinancial centre and its domestic financial services industry is much larger,more diverse and less concentrated than in Scandinavia. Furthermore, theUK’s Financial Services Authority is responsible for both prudential andconduct of business regulation, unlike its counterparts in Scandinaviawhich have focused on prudential regulation only. . . . Finally, the forma-tion of the UK Financial Services Authority has been undertaken as a radi-cal, “Big Bang” measure, bringing together nine existing regulatory bodies.By contrast, the Scandinavian integrated regulators were the product of along process of agency consolidation, and were formed primarily from themerger of banking and insurance inspectorates . . . the growth of bancas-surance business [that is, financial conglomerate groups combining bothbanking and insurance activities] was regarded as a powerful reason foradopting an integrated approach to supervision [in most Scandinaviancountries]. . . . None of the three Scandinavian integrated regulatory bodies[in Sweden, Norway, and Denmark] was created by removing the bankingsupervision function from the central bank: in each case the regulationof commercial banks had long been conducted by a specialist bankingsupervisory body.311

308 See Taylor & Fleming, supra n. 133, at 8.309 Financial Supervision Authority Act, 1993, of Finland, sec. 8.310 See id. sec. 5.311 See Taylor & Fleming, supra n. 133, at 9 and 17.

4.7 Unified Financial Services Supervision in the United Kingdom

In the UK, the Bank of England Act 1998 transferred banking supervision fromthe Bank of England to the Financial Services Authority.312 Until then, the legalpedigree for powers of the Bank to conduct financial services supervision restednot only in the Banking Act 1987 but also in section 101(4) of the Building Soci-eties Act 1986 and in the Banking Coordination (Second Council Directive) Reg-ulations 1992. Under these laws, the core responsibilities of the Bank of Englandrelated to monetary stability, monetary analysis, monetary operations, bankingactivities, financial stability, and supervision and surveillance. Today powers tosupervise banks, listed money market institutions (as defined in section 43 of theFinancial Services Act 1986313), and related clearing houses (as defined in sec-tion 171 of the Companies Act 1989) now rest with the Financial ServicesAuthority.314 Under section 153 of the Financial Services and Markets Act 2000,the Authority has power to exercise its rule-making powers in writing.

The institutional and regulatory framework set up by the Bank of England Act1998 endeavors, inter alia, to balance the roles of the Bank and of the Treasury.As Blair observes:

This aspect is the one that has attracted the greatest amount of public atten-tion. So far as the law is concerned, section 10 removes from the Treasurythe power to give directions to the Bank in relation to monetary policy. Thatsaid, the Treasury have . . . important powers to condition the general strat-egy in relation to monetary policy. Critically, section 12 enables the Trea-sury to specify what price stability is to be taken to consist of, and what thegovernment’s economic policy is to be taken to be. These are the two ele-ments, and the only two elements, of the Bank’s statutory objectives in rela-tion to monetary policy, though the second of them contains a subsidiaryreference to objectives for growth and employment.315

In general, the areas expected to be influenced by enactment of the Bank ofEngland Act 1998 are the stability of the financial system as a whole and of the


312 See Bank of England Act 1998, Section 21. It is important to delineate clearly the rolesof any other supervisory authority so as to avoid the potential for conflicts of interest.For further readings see C. Lindgren, Authorities’ Roles and Organizational Issues in Systemic Bank Restructuring, Working Paper WP/97/92-EA (IMF 1997).313 Repeal of this act is being considered.314 See C. Ryan, Transfer of Banking Supervision to the Financial Services Authority, inM. Blair, R. Cranston, C. Ryan & M. Taylor, Blackstone’s Guide to The Bank of EnglandAct 1998 39 (Blackstone Press Limited 1998).315 M. Blair, Introduction and Overview, in Blair, et al., id. at 5.


monetary system in particular; the financial system infrastructure, especiallypayments systems; broad oversight of the financial system as a whole; the abilityto conduct what may loosely be described as official support operations; and theefficiency and effectiveness of the financial sector, with particular regard to inter-national competitiveness. 316

It was believed that the system that existed before the Financial ServicesAuthority was introduced in the UK lacked transparency and adequate accounta-bility, partly because it was so fragmented.317 Consolidated prudential supervisionof multifunctional financial groups, it was argued, provided for an efficient way ofmanaging the risks of different financial activities (for example, traditional retailbanking and securities trading)318 while also being more publicly accountable andtransparent.319 Today, the Financial Services Authority is expected to carry outprudential financial supervision in accordance with a number of EU directives, allof which have been implemented in the UK. As Bartolini observes, “Most recently,the EU’s Capital Adequacy Directive (CAD) and CAD II (implemented in the UKon January 1, 1996, and on September 30, 1998, respectively) have extended theUK supervisory picture to cover market risk and have provided scope for internalvalue-at-risk (VaR) models to determine risk capital.”320

It is, however, argued that the UK regulators retain significant flexibility withrespect to these directives and other international standards.321 An example oftencited is that the UK typically sets capital ratios above the Basel Accord guidelineminimum of 8 percent.322 Another example is that UK sets required capital ratios infirm-specific fashion, applying account credit and market risk factors on a consol-idated basis to all financial firms within a group.323 Furthermore, the prudentialrequirements applicable to authorized firms limit maximum exposure to singlecounter-parties or related groups.324 The liquidity requirements emphasize twomajor areas: securing an institution’s access to enough cash and high-quality near-cash assets to meet its obligations, and provisioning for bad and doubtful debts.325

316 See Blair, id. at 6–7.317 See Bartolini, The Financial Services Authority: Structure, Mandate, and Policy Issues,in Samiei, et al., supra n. 77, at 32.318 See id. at 31.319 See id. at 32.320 See id. at 27. 321 See id.322 See for example, id. 323 See id.324 See id. at 28.325 See id.

Experience has shown some of the shortcomings of a unified model for finan-cial services supervision:

Advocates of a narrow role for central banks argue that if the central bank [orwhichever institution performs the role of lender of last resort (LOLR)326]must provide liquidity assistance to avert a financial crisis, then it should doso only by providing liquidity to the market at large, e.g., through open mar-ket operations, leaving to the market the task of allocating liquidity to worthyborrowers. This conduct would minimize moral hazard, both for potentialbeneficiaries of liquidity rescues (which would have fewer incentives toassume socially excessive risks) and for other banks (who would need to stepup peer monitoring and associated market discipline). Expanding the role ofa central bank to include supervisory responsibilities may also significantlyraise the cost of a supervisory failure, which would damage the central bank’sreputation and the credibility of its monetary policy. Furthermore, the man-dates of banking supervision and of price stability are subject to a potentialconflict of interest: a central bank responsible for supervision could leantoward lax monetary policy if this was perceived to avert bank failures. . . . Awidely held view among advocates of an active LOLR mandate is that cen-tral banks (or whoever performs the function of LOLR) may deter the banks’tendency to assume excessive risk by keeping details of the LOLR practices“constructively” ambiguous, i.e., by retaining discretion as to whether, when,and under what conditions, emergency liquidity support will be provided.327

4.8 Recent Regulatory Developments in the United Kingdom

A new single Financial Services Ombudsman is now in operation in the UK. OnDecember 1, 2001, the Financial Services Ombudsman received full powers,under the Financial Services and Markets Act 2000, to assume voluntary juris-diction over mortgage lenders not authorized by the FSA and firms not author-ized by FSA, whose activities were previously covered by membership in aformer ombudsman scheme.328 The Financial Services Ombudsman itself, under


326 The IMF argues that while countries such as Germany, Japan, and—recently—Australia have separated the functions of banking supervision and lender-of-last-resort(LOLR), the U.S., Italy, and (to some extent) France have opted for a broad central bankrole, combining both monetary policy/LOLR and banking supervision. For a detailed dis-cussion, see id. at 36–37.327 See id. at 36 and 41.328 SeeThe Financial Ombudsman Service, Our Voluntary Jurisdiction, http://www.financial-ombudsman.org.uk/vj.htm (accessed March 31, 2004).


section 227 of the 2000 Act, makes rules relating to the scope of its voluntaryjurisdiction. It must be pointed out that

The Financial Services and Markets Act 2000 (FSMA) provides the statu-tory framework for the new UK market abuse regime, which became effec-tive on 1 December 2001. The FSMA market abuse regime provides newpowers to the Financial Services Authority (FSA) to sanction anyone whoengages in “market abuse,” that is misuse of information, misleadingpractices, and market manipulation, relating to investments traded on pre-scribed UK markets. It also applies to those who require or encourage oth-ers to engage in conduct that would amount to market abuse. FSMA’s statedobjective is to fill the “regulatory gap” by giving the FSA substantial pow-ers to punish unregulated market participants whose market conduct fallsbelow acceptable standards, but does not rise to the level of a criminaloffence.329

The main statutory provisions prohibiting insider dealing in the UK can befound in Part V of the Criminal Justice Act of 1993, reinforced by Section 118 ofthe Financial Services and Markets Act 2000, and the proposed European UnionDirective on Market Abuse.330

In general, the Financial Services Ombudsman receives and handles consumercomplaints that do not rise to the level of a criminal offense, so that the FSA canaccomplish its tasks, which include supervising wholesale markets in over-the-counter derivatives.331 As the IMF observes:

The FSA’s goal is to promote “awareness of the benefits and risks associ-ated with different kinds of investment or other financial dealing” whilesafeguarding “the general principle that consumers should take responsi-bility for their decisions” [Financial Services and Markets Bill, Clauses4(2)(a) and 5(2)(c)332]. . . . In practice, the FSA plans to protect consumersof financial services by intervening at several stages: 1) by vetting firms at

329 K. Alexander, Insider Dealing and Market Abuse: The Financial Services and MarketsAct 2000, working paper abstracted at http://ideas.repec.org/p/cbr/cbrwps/wp222.html(accessed March 31, 2004). 330 Directive 2003/6/EC of the European Parliament and the Council of 28 January 2003on insider dealing and market manipulation (market abuse), OJ L 96, 12.4.2003, p 16. Fora further reading, see generally Alexander, id.331 Bartolini, supra n. 317, at p. 29.332 Bartolini argues that one of the main innovations regulatory reform has introduced intoUK financial system is the separation of the functions of banking supervision (now under-taken by the Financial Services Authority) from the provision of emergency liquidity (theBank of England will continue to be the LOLR). See id. at 26.

entry, to ensure that only those found to be “fit and proper” are permittedto conduct financial business; 2) by setting and enforcing prudential stan-dards; 3) by using its powers of investigation, enforcement, and restitutionagainst firms that fail to meet expected standards; 4) by setting a “one-stop”arrangement for resolving disputes between consumers and authorizedfirms—the single “Financial Services Ombudsman Scheme”; 5) by over-seeing the compensation of investors when an authorized firm is unable tomeet its liabilities. . . . Unsurprisingly, the approach taken by the FSA tobalance consumer protection with the preservation of strong elements ofcaveat emptor—consumers must take significant responsibility for theirown financial decisions—has spurred a lively debate in the UK.333

Under the new system that introduced the FSA, five existing compensationschemes are merged into one, the UK Financial Services and Markets Compensa-tion Scheme (FSMC).334 One of the notable aims of FSMC is to at least partiallysafeguard consumers of financial services against failure of authorized institutionsto deliver on their obligations.335 Today, the FSA has taken on new roles that werenot covered by the previous regulatory regimes, among them the following:336

• Mutual Societies Registration—FSA is now responsible for the registrationand public records of about 9,500 industrial and provident societies, 3,000societies registered under the Friendly Societies legislation, 700 creditunions, and 70 building societies.

• Unfair Terms in Consumer Contracts—FSA has powers under the UnfairTerms in Consumer Contract Regulations 1999 to take action to deal withunfair terms in financial services consumer contracts.

• Lloyd’s Insurance Market—FSA is responsible for regulating the Lloyd’sinsurance market. Large parts of the FSA Handbook (the rule book) applyto the Society of Lloyd’s and the underwriting agents working in the Lloyd’smarket, although some provision is made for the unique nature of the mar-ket. Both the Society and underwriting agents are subject to FSA oversight,but the Society’s regulatory division carries out some supervision of under-writing agents for FSA.

• The Code of Market Conduct—This is part of the new regime for tacklingmarket abuse. FSA exercises powers under civil law to bridge what was a


333 See id. at 33.334 See id. at 30.335 See id.336 See Financial Services Authority, New Responsibilities, http://www.fsa.gov.uk/what/new_responsibilities.html (accessed March 31, 2004).


significant gap in the ability of the UK authorities to deal with marketabuse.

• Recognized Overseas Investment Exchanges—FSA is responsible forapplications from, and supervising, recognized overseas investmentexchanges (ROIEs) and recognized overseas clearing houses (ROCHs),having taken over these responsibilities from the Treasury. Current ROIEsinclude the Sydney Futures Exchange and NASDAQ. Recognized overseasbodies are subject to the recognition requirements laid down in the Finan-cial Services and Markets Act 2000, which are designed to ensure that theydeliver a standard of investor protection equivalent to that required of UKrecognized bodies. The concept relies on the home regulators of the over-seas bodies to supervise them effectively.

4.9 Conclusion

In making a case that unified financial services supervision has varied fromcountry to country and that there is no single right way of introducing or imple-menting such models, this chapter has provided as case studies Latvia, the Scan-dinavian countries, and the UK, highlighting differences in such areas as theorganization of the regulator, the objectives of regulation, and the regulatory andinstitutional frameworks for financial services supervision. A functional matrixorganizational approach, in contrast to the sectoral approach, showed differencesin how different countries have approached the introduction and implementationof unified financial services supervision. In countries where segments of thefinancial sector are interconnected, there is a good case for moving toward uni-fied financial services supervision does exist.

The conclusion drawn from these country studies is that there is no strong evi-dence of the crystallization of best practices in the structure of unified regulatorsand that until there is a longer track record of experience with unified agencies,it is difficult to come to firm conclusions about the restructuring process itself,and the optimal internal structure of unified regulators.




by Kishor Uprety










Publishers, Moscow








C H A P T E R 5

Conclusion

This book examined the legal aspects of the introduction of models of unifiedfinancial services supervision. It has provided an interdisciplinary exposition ofthe law, fleshing out practical legal and policy issues that need to be consideredin drafting a law to provide for a sound framework for unified supervision offinancial services. The study highlighted two fundamental questions for coun-tries contemplating the introduction of a unified financial services regulator:Should some model of unified financial services supervision be followed? If so,how should that be done?

It is argued that countries should address these questions with reference totheir own economic, institutional, and political circumstances. Reorganizationof the regulatory structure may at times be ill-advised. For example, in a countrythat has pressing financial and economic issues, these should be dealt with first.Moreover, it is questionable whether a country facing major imminent challengesin its financial sector—such as insolvencies among major banks—should be con-templating wholesale reorganization of the regulatory function, which mightdeflect attention away from the problems at hand. In other countries, as this studypoints out, where the various segments of the financial sector (insurance, securi-ties, pensions, and banking) have very little connection with each other, main-taining the status quo would be more appropriate, at least in the short term. Somecountries may not even have enough financial resources and well-trained humancapital to implement unified financial services supervision.

Although there is not much evidence of the existence of broadly acceptedstandards of best practices in the structuring of unified financial services regu-lators, there is some evidence of common threads that could guide policy mak-ers and law reform institutions in the design of a sound legal framework for theunified supervision of financial services.337 In particular, the legal and regula-tory framework should be designed so as to protect investors and consumers andto help build investor confidence in the market. Also, the design should aim atestablishing a fair, transparent, and efficient market that reduces systemic risk.The law should protect financial services businesses from malpractices of someconsumers while promoting consumer confidence in the financial system. Reg-ulators and supervisors should be afforded judicial immunity against lawsuits

89

337 See generally, International Developments Parts I and II, supra n. 1.


for actions or omissions done in good faith and in the course of business. Froman economic standpoint, the framework should be able to provide incentives toredress the information imbalance that sometimes exists between consumersand financial services businesses in favor of consumers. This goal can beachieved by imposing minimum standards of business conduct for financialservices businesses.

It is possible for a country to have more than one level of regulation guiding thesupervision of financial services. Canada, for example, has two main tiers. Whilethe Office of the Superintendent of Financial Institutions (OSFI) is the primaryregulator of federally chartered financial institutions, such as some insurance com-panies, pension funds, trusts, and loans companies,338 the regulation of securities onCanadian stock exchanges is left to provincial agencies. This bicameral structurealigns itself with the Canadian Constitution, which requires all banks, federallyincorporated insurance companies, pension funds, trusts, and loan companies to belicensed and regulated at the federal level. These are the primary institutions OSFIregulates. Though by law, all banks must be incorporated and regulated at thefederal level,339 some insurance companies, trusts, and loan companies are provin-cially chartered and thus are licensed and regulated by the provinces.340 Securitiesfirms are incorporated at the provincial level and are, like other financial institu-tions chartered at the provincial level, subject to the laws and licensing requirementsof the province where incorporation and licensing has taken place.

The cardinal point here is that in Canada unified financial services supervi-sion applies principally to institutions regulated at the federal level, not to thoseregulated at the provincial level. This model is unique to Canada, demonstratingthat every country has country-specific conditions that necessitate a particularway of introducing and implementing unified financial services supervision.

338 By virtue of the Canadian Constitution—The Constitution Act, 1867, 30 & 31 Victoria,c. 3. (U.K.)—the mission of OSFI is to safeguard policy holders, depositors, and pensionplan members from undue loss. OSFI supervises and regulates all banks and all federallyincorporated or registered trust and loan companies, insurance companies, cooperativecredit associations, fraternal benefit societies, and pension plans. As explained on theOSFI website (http://www.osfi-bsif.gc.ca/eng/default.asp?ref=home, accessed April 4,2004): “OSFI is committed to providing professional, high-quality and cost-effectiveservice. This is achieved by advancing and administering a regulatory framework thatcontributes to public confidence in the financial services industry. At the same time, OSFIensures the regulatory system does not preclude institutions from competing effectively.”339 See generally the British–North American Act 1867 (the Canadian Constitution).340 In Canada, a notable feature of provincial-level licensing is that a financial institutionchartered at the provincial level must be licensed separately in every province where itdecides to conduct financial services business, whereas other financial institutionslicensed and regulated at the federal level are under no obligation to seek provinciallicensing if they decide to undertake financial services business in any province.

Conclusion 91

There have been efforts in the past to set up a Canadian nationwide securities reg-ulator, akin to the U.S. Securities and Exchange Commission, but the results havebeen minimal, mainly because the provinces are unwilling to give up their regu-latory powers. Thus, although some commentators might want to argue thatCanada could benefit from a model of supervisory unification like that of theUK, the historical and constitutional background to Canada’s regulatory frame-work poses some interesting challenges. To overcome some of those posed by theCanadian Constitution to prospects for full unification of the supervisory func-tions in Canada, the Hockin-Kwinter Accord341 defines special procedures forhow federal regulators can gain access to information on securities firms that areowned by banks.

In Canada, a bank that in addition to its normal banking business providesinvestment advice or deals in securities must also obtain authorization from thecompetent provincial securities regulator. Similarly, collective investmentschemes, such as mutual funds or unit trusts, that are involved in securities tradeand investment require provincial authorization. Thus, the structure of securitiesregulation in Canada that has evolved historically incorporates both federal andprovincial laws.

Depending on country-specific conditions and the objectives of introducing aunified regulator, this book argues that the regulatory framework in any countrycan combine any instruments, such as primary and secondary legislation, andprinciples, rules, codes, or guidance or policy directives issued by the regulator.Some countries have fewer levels of regulation, others have more. How the regu-latory framework is structured depends on a host of factors, some of which areentirely political and ideological.

Overall, it is important to ensure that a unified regulator is clothed with the statu-tory and regulatory powers that enable it to carry out its functions responsibly andefficiently. Most unified regulators have been given statutory powers to authorizea business to conduct regulated activities and to supervise regulated businesses. Ina number of cases, unified regulators have powers to inspect, investigate, andenforce compliance with legal requirements, either by imposing license require-ments or withdrawing authorization to do business. In addition, if a unified regula-tor is to function efficiently, it must be able to tap into the information resources ofother regulators, by sharing relevant information with them. These are some of thenotable factors that must be considered in drafting a good law or designing a soundregulatory framework for unified financial services supervision.

Further, the design of an efficient framework for unified financial servicessupervision should factor in a structure for the regulator that is based on sound

341 See generally, International Developments Parts I and II, supra n. 1.


principles of corporate governance. The regulatory framework should strike abalance between the independence and the accountability of the regulator, assign-ing adequate apolitical powers to appoint and dismiss the Chief Executive Officerof the regulator, identifying minimum qualifications for appointment to thatposition, spelling out the transparency with which decisions of the regulatory bodyshould be made, promoting client confidentiality, regulating timely and adequatedisclosure of information, and penalizing market abuses and misconducts.

Evidence presented in chapter 3 showed that the process of and the obstaclesencountered in structuring a unified regulator have differed from country tocountry, thus undermining any case for best practices of unified financial serv-ices supervision. It may be concluded that any decision to set up a unified regu-lator should be preceded by well-prepared feasibility studies that, for example,identify evidence of strong interconnectedness among the segments of the finan-cial sector, threats of systemic risk and contagion, the emergence of universalbanking, increases in product innovation in the financial market, increases in thenumber of group companies operating in it, the internationalization of businessesin the financial sector, and other features already examined above.

It is of paramount importance that the regulatory framework address the shar-ing of information between a host regulator and foreign regulators as needed, orbetween a unified regulator and other stakeholders in the financial sector, suchas the central bank, a deposit insurance agency, the Ministry of Finance, the taxauthority, and the registrar of companies. In many countries, including theUnited Kingdom, Hungary, and Zambia, such efforts are being addressedthrough a memorandum of understanding that brings various stakeholders to thetable. It is advisable that countries contemplating the introduction of a unifiedregulator consider a memorandum-of-understanding strategy to encourageinformation sharing.

93

A P P E N D I X 1

The Estonian Financial Supervisory Authority Act, 2001*

Chapter 1

General Provisions

§ 1. Scope of application of ActThis Act determines the objective of state financial supervision and the legal sta-tus, the bases for the activities and the bases and procedure for the financing ofthe Financial Supervisory Authority.

§ 2. State financial supervision(1) For the purposes of this Act, state financial supervision (hereinafter financialsupervision) is the supervision of subjects of state financial supervision (here-inafter subjects of financial supervision) and of the activities provided for in thisAct, the Credit Institutions Act (RT1 I 1999, 23, 349; 2000, 35, 222; 40, 250), theInsurance Activities Act (RT I 2000, 53, 343; 2001, 43, 238), the Insurance Act(RT 1992, 48, 601; RT I 1995, 26–28, 355; 1996, 23, 455; 40, 773; 1998, 61, 979;1999, 10, 155; 27, 389; 2000, 53, 343; 2001, 43, 238), the Investment Funds Act(RT I 1997, 34, 535; 1998, 61, 979; 2000, 10, 55; 57, 373), the Pension Funds Act(RT I 1998, 61, 979), the Securities Market Act (RT I 1993, 35, 543; 1995, 22,328; 1996, 26, 528; 1997, 34, 535; 1998, 61, 979; 2000, 10, 55), the EstonianCentral Register of Securities Act (RT I 2000, 57, 373), and legislation estab-lished on the basis thereof.

(2) For the purposes of this Act, a subject of financial supervision is a person towhom the right to operate in the corresponding field of activity has been grantedby a competent authority on the basis of an Act specified in subsection (1) of thissection.

§ 3. Objective of financial supervisionFinancial supervision is conducted in order to enhance the stability, reliability,transparency and efficiency of the financial sector, to reduce systemic risks and

* Unofficial translation, available at <http://www.legaltext.ee/text/en/X50008K4.htm>.1 RT = Riigi Teataja = the State Gazette

94 Appendix 1

to promote prevention of the abuse of the financial sector for criminal purposes,with a view to protecting the interests of clients and investors by safeguardingtheir financial resources, and thereby supporting the stability of the Estonianmonetary system.

§ 4. Financial Supervisory Authority(1) The Financial Supervisory Authority (hereinafter the Supervisory Authority)is an agency with autonomous competence and a separate budget, which operatesat the Bank of Estonia and the directing bodies of which act and submit reportspursuant to the procedure provided for in this Act.

(2) The Supervisory Authority conducts financial supervision in the name of thestate.

(3) The Supervisory Authority is independent in the conduct of financialsupervision.

§ 5. Principles of activities of Supervisory AuthorityThe Supervisory Authority shall operate pursuant to legislation and the interna-tionally recognized principles relating to financial supervision and shall actopenly and transparently and apply the principles of sound administration. TheSupervisory Authority shall use the assets at its disposal prudently.

§ 6. Functions and rights of Supervisory Authority(1) The functions of the Supervisory Authority in fulfilling the objectives offinancial supervision are to:

1) analyse and monitor constantly the compliance of subjects of financialsupervision with the requirements for financial soundness and own funds,and other obligations prescribed by the Bank of Estonia Act (RT I 1993, 28,498; 30, correction notice; 1994, 30, 463; 1998, 64/65, 1006; 1999, 16, 271),the Acts specified in subsection 2 (1) of this Act, and legislation establishedon the basis thereof;

2) guide and direct subjects of financial supervision in order to ensure soundand prudent management;

3) apply measures prescribed by legislation to protect the interests of clientsand investors;

4) apply administrative coercion on the bases, to the extent and pursuant tothe procedure prescribed by Acts;

5) make proposals for the establishment and amendment of Acts and otherlegislation concerning the financial sector and related supervision, and par-ticipate in the drafting of such Acts and legislation;

Appendix 1 95

6) co-operate with international financial supervision organizations and for-eign financial supervision authorities and other competent foreign authori-ties and persons;

7) perform the functions arising from the Deposit Guarantee Fund Act (RT I1998, 40, 612) and the Money Laundering Prevention Act (RT I 1998, 110,1811; 2000, 84, 533);

8) perform other functions arising from law which are necessary to fulfill theobjectives of financial supervision.

(2) In the performance of its functions, the Supervisory Authority has all therights provided for in this Act, the Acts specified in subsection 2 (1) of this Actand legislation established on the basis thereof.

Chapter 2

Management of Financial Supervisory Authority

Division 1

Supervisory Board

§ 7. Competence of supervisory board(1) The activities of the Supervisory Authority shall be planned and the manage-ment thereof shall be monitored by the supervisory board of the SupervisoryAuthority (hereinafter the supervisory board).

(2) The supervisory board shall:

1) approve the operating strategy of the Supervisory Authority at the pro-posal of the management board of the Supervisory Authority (hereinafter themanagement board);

2) approve, on the proposal of the management board, the budget of theSupervisory Authority and, in the case specified in § 45 of this Act, the sup-plementary budget, and make a proposal to the Minister of Finance concern-ing the rate of the share of the supervision fee calculated on the basis ofassets for the following budgetary year;

3) approve, on the proposal of the management board, the bases for develop-ing the structure of the Supervisory Authority and for the payment ofremuneration;

4) appoint the members of the management board and elect the chairman ofthe management board from among the members;

5) remove members of the management board;

96 Appendix 1

6) decide on entry into, amendment of and termination of contracts of serv-ice with the chairman and members of the management board;

7) approve the size of the remuneration and additional sums payable and thesocial guarantees applicable to the chairman and members of the manage-ment board;

8) decide on the filing of a claim against the chairman or a member of themanagement board concerning compensation for damage caused by him orher to the state through violation of a legal act or his or her obligations;

9) approve the annual report of the Supervisory Authority submitted by themanagement board;

10) approve the rules for the activities of the supervisory board.

§ 8. Members of supervisory board(1) The supervisory board shall consist of six members, two of whom are mem-bers by virtue of office and four of whom are appointed members.

(2) The Minister of Finance and the President of the Bank of Estonia are mem-bers of the supervisory board by virtue of office.

(3) One-half of the appointed members of the supervisory board shall beappointed and removed by the Government of the Republic on the proposal of theMinister of Finance and one-half by the Board of the Bank of Estonia on the pro-posal of the President of the Bank of Estonia.

§ 9. Requirements for members of supervisory board(1) Appointed members of the supervisory board shall be Estonian citizens withactive legal capacity, an academic degree recognized by the state or educationcorresponding to such level, an impeccable professional and business reputation,and the experience necessary to manage an agency in the financial or publicsector.

(2) The following shall not be appointed as members of the supervisory board:

1) persons under preliminary investigation for or accused of a criminaloffence for which the law prescribes imprisonment or persons with a crimi-nal record for criminal official misconduct or any other intentionally com-mitted criminal offence;

2) persons whose previous unlawful act or omission has resulted in thebankruptcy, compulsory dissolution or revocation of the activity licence of acompany;

3) bankrupts or persons who are subject to a prohibition on business or fromwhom the right to engage in economic activity has been taken away pursuantto law.

Appendix 1 97

(3) The provisions of subsections 32 (1) and (2) of this Act concerning the avoid-ance of conflicts of interests and the provisions of § 34 of this Act concerning theduty to maintain confidentiality apply to members of the supervisory board.

§ 10. Term of authority of members of supervisory board(1) The authority of a member of the supervisory board specified in subsection 8(2) of this Act shall expire upon the expiry of his or her authority in the office byvirtue of which he or she belongs to the supervisory board.

(2) The term of the authority of appointed members of the supervisory board shallbe three years as of their appointment.

(3) Upon expiry of the term of the authority of an appointed member, he or sheshall perform his or her duties until the appointment of a new member.

(4) Upon expiry of the term of the authority or the removal or death of anappointed member of the supervisory board, the person who initially appointedthe member shall appoint a new member of the supervisory board within a rea-sonable period of time.

§ 11. Removal of member of supervisory board(1) An appointed member of the supervisory board is removed before the expiryof his or her term of authority within three months after receipt of a correspon-ding written application from the member.

(2) An appointed member of the supervisory board shall be immediately removedbefore the expiry of his or her term of authority if:

1) a judgment of conviction made against him or her in a criminal matterenters into force;

2) he or she violates the provisions of subsection 32 (1) or (2) or § 34 of thisAct;

3) a bankruptcy order enters into force or a prohibition on business is appliedwith regard to him or her or the right to engage in economic activity is takenaway from him or her pursuant to law;

4) he or she does not comply with the requirements established by this Actfor appointed members or submits false information concerning compliancewith such requirements.

(3) An appointed member of the supervisory board may be removed before theexpiry of his or her term of authority if he or she suffers from an illness lastingfor more than four months or if there is any other good reason due to which he orshe is unable to perform his or her duties.

§ 12. Chairman of supervisory board(1) The Minister of Finance shall be the chairman of the supervisory board.

98 Appendix 1

(2) The chairman of the supervisory board shall organise the activities andadministration of the supervisory board, call and chair the meetings of the super-visory board, organise the taking of minutes at the meetings and disclosure of theresolutions of the supervisory board and enter into, amend, suspend and termi-nate contracts of service with the chairman and members of the managementboard on the basis of a resolution of the supervisory board.

(3) In the absence of the chairman of the supervisory board, the duties of thechairman shall be performed by the eldest member of the supervisory board pres-ent at the meeting.

§ 13. Calling meetings of supervisory board(1) Regular meetings of the supervisory board shall be held at least once everythree months.

(2) Extraordinary meetings of the supervisory board shall be called on the initia-tive of the chairman of the supervisory board at the request of at least two mem-bers of the supervisory board or the chairman of the management board. Therequest shall set out the matters to be decided and a proposal concerning the timeof the meeting.

(3) A notice concerning an ordinary meeting of the supervisory board shall besent to the members of the supervisory board at least ten days before the date ofthe meeting. Members of the supervisory board shall be notified of an extraordi-nary meeting of the supervisory board at least one working day in advance.

(4) A notice calling a meeting of the supervisory board shall set out the time andplace of the meeting and the agenda together with the names of the persons pre-senting reports.

§ 14. Organisation of activities of supervisory board(1) Members of the supervisory board shall personally participate in the activi-ties of the supervisory board.

(2) Meetings of the supervisory board shall be closed unless the supervisoryboard decides otherwise.

(3) Members of the management board have the right to participate in the meet-ings of the supervisory board unless the chairman of the supervisory boarddecides otherwise.

(4) Issues relating to meetings of the supervisory board shall be provided for inthe rules for the activities of the supervisory board, including:

1) the procedure for the election of the chairman of the management board;

2) the procedure for giving notice of meetings of the supervisory board;

3) the procedure for communicating documents concerning the agenda of ameeting to the members of the supervisory board;

Appendix 1 99

4) the information to be recorded in the minutes of a meeting, including thecontent of the resolutions of the supervisory board and issues relating to therecording of voting results;

5) the procedure for adoption of resolutions of the supervisory board with-out calling a meeting, the information to be entered in records of votes andthe procedure for preservation of draft resolutions and the positions and dis-senting opinions of the members of the supervisory board.

(5) Members of the supervisory board shall receive monthly remuneration in theamount of twice the minimum monthly wage.

(6) The technical administration of the activities of the supervisory board shall beensured by the management board.

§ 15. Resolutions of supervisory board(1) Each member of the supervisory board has one vote. Unless otherwise pro-vided by this Act, members of the supervisory board do not have the right toabstain from voting or to remain undecided.

(2) A resolution of the supervisory board is adopted if at least four members ofthe supervisory board vote in favor. In matters specified in clause 7 (2) 10) of thisAct, a resolution of the supervisory board is adopted if all members of the super-visory board vote in favor.

(3) A member of the supervisory board shall give notice to the supervisory boardif he or she is directly or indirectly personally interested in a resolution to bedebated. A member of the supervisory board is required to give notice if his orher child, parent, sister, brother, spouse or cohabitee, or a parent, child, brother orsister of his or her spouse or cohabitee is:

1) a member of the management board or a person to be appointed as a mem-ber of the management board, before voting on issues provided for in clauses7 (2) 4)–8) of this Act;

2) a person required to pay the supervision fee specified in subsections 36(1)–(3) of this Act or a shareholder with a qualifying holding in such personor a person who exercises dominant influence on the management thereof inany other manner or is a member of its management body, before voting onissues provided for in clause 7 (2) 2) of this Act.

(4) If circumstances specified in subsection (3) of this section become evident,the member of the supervisory board shall abstain from voting unless all othermembers of the supervisory board who participate in the vote agree to his or hervoting.

(5) A member of the supervisory board who votes against a resolution of thesupervisory board has the right to submit his or her dissenting opinion.

100 Appendix 1

§ 16. Minutes of meetings of supervisory board(1) Minutes shall be taken of meetings of the supervisory board.

(2) The chairman of the supervisory board and the secretary shall sign theminutes.

(3) Written dissenting opinions submitted by members of the supervisory boardshall be annexed to the minutes. A notation shall be made in the minutes con-cerning the annexing of a dissenting opinion, and the member of the supervisoryboard who submitted the opinion shall confirm the notation with his or hersignature.

(4) Minutes of meetings of the supervisory board shall be preserved in the Super-visory Authority indefinitely. The management board shall organise storage ofthe minutes and annexes thereto and shall be responsible for their preservation.

§ 17. Adoption of resolutions without calling meeting(1) The supervisory board has the right to adopt resolutions without calling ameeting of the supervisory board if all members of the supervisory board consentthereto and hold a certificate for giving digital signatures issued pursuant to theDigital Signatures Act (RT I 2000, 26, 150; 92, 597).

(2) The supervisory board does not have the right to adopt resolutions on issuesspecified in clauses 7 (2) 1), 4) or 10) of this Act without calling a meeting of thesupervisory board.

(3) Upon adoption of a resolution of the supervisory board in the manner pro-vided for in subsection (1) of this section, all proposals, positions and decisionsshall be certified by digital signatures.

(4) The chairman of the supervisory board shall send a draft resolution to allmembers of the supervisory board and specify the term by which the members ofthe supervisory board must present their positions. If a member of the supervi-sory board fails to present his or her position within the specified term, he or sheis deemed to have voted against the resolution.

(5) The provisions of § 15 of this Act apply to the adoption of resolutions.

(6) Minutes shall be taken of voting results and shall be sent immediately to allmembers of the supervisory board and to the management board.

Division 2Management Board

§ 18. Competence of management board

(1) The management board shall manage and organise the activities of the Super-visory Authority. The management board is competent to adopt all resolutionsrelating to the performance of the obligations of the Supervisory Authority and

Appendix 1 101

to perform all obligations and exercise all rights which pursuant to this Act arenot in the competence of the supervisory board, the chairman of the supervisoryboard or the chairman of the management board. The management board shallexecute the resolutions made by the supervisory board pursuant to subsection 7(2) of this Act.

(2) In issues relating to the conduct of financial supervision on the bases providedfor in the Acts specified in subsection 2 (1) of this Act, the management boardshall decide on:

1) the issue and revocation of activity licenses and other issues relating toactivity licenses;

2) the grant of consent, permission or concordance;

3) issues relating to performance of the registration obligation and enteringitems in lists;

4) the issue of precepts;

5) the application of administrative coercive measures;

6) the imposition of administrative penalties;

7) the ordering of special audits or expert assessments;

8) the establishment of a moratorium or a special regime and the perform-ance of related acts;

9) the filing of bankruptcy petitions and the performance of other acts relat-ing to bankruptcy or liquidation proceedings.

(3) In issues relating to the management and organisation of activities, the man-agement board shall:

1) submit the strategy of the Supervisory Authority to the supervisory boardfor approval;

2) submit the draft budget of the Supervisory Authority to the supervisoryboard for approval together with a proposal concerning the rate of the shareof the supervision fee calculated on the basis of assets, payable on the basisof this Act for the following budgetary year;

3) submit the draft supplementary budget to the supervisory board forapproval in the case provided for in § 45 of this Act;

4) decide, pursuant to and to the extent of the budget approved by the super-visory board, on the acquisition and transfer of immovables and of movablesto be entered in a register;

5) submit proposals to the supervisory board concerning development ofthe structure of the Supervisory Authority and the bases for paymentof remuneration;

102 Appendix 1

6) approve the structure and staff of the Supervisory Authority pursuant tothe bases approved by the supervisory board;

7) approve the accounting policies and procedures of the SupervisoryAuthority;

8) submit the report provided for in subsection 49 (1) of this Act to the super-visory board for their information;

9) approve the procedure for conducting internal audits of the SupervisoryAuthority;

10) if necessary, involve experts in the conduct of financial supervision;

11) form work groups and committees for the performance of the functionsof the Supervisory Authority;

12) decide on entry into co-operation agreements specified in § 50 of thisAct;

13) decide on entry into co-operation agreements with foreign financialsupervision authorities and other competent foreign bodies or persons;

14) submit an overview of the activities of the Supervisory Authority and anincome and expense statement to the supervisory board once per quarter;

15) submit the annual report of the Supervisory Authority to the supervisoryboard for approval;

16) approve the rules for the activities of the management board;

17) decide on other issues relating to the organisation of the regular activi-ties of the Supervisory Authority if such decision is requested by at least twomembers of the management board.

§ 19. Members of management board(1) The management board shall consist of five members.

(2) The members of the management board shall be appointed and removed bythe supervisory board.

§ 20. Requirements for members of management board(1) Members of the management board must be Estonian citizens with activelegal capacity and an academic degree recognized by the state or education cor-responding to such level, the expertise necessary to manage the SupervisoryAuthority, professional suitability, an impeccable professional and business rep-utation and a total of at least five years’ work experience in the fields of finance,law, auditing or information technology or in public service in a position relatingto such fields.

(2) The following shall not be appointed as members of the management board:

Appendix 1 103

1) members of the supervisory board;

2) members of the Board of the Bank of Estonia or the Executive Manage-ment of the Bank of Estonia;

3) auditors of the Bank of Estonia;

4) persons under preliminary investigation for or accused of a criminaloffence for which the law prescribes imprisonment or persons with a crimi-nal record for criminal official misconduct or any other intentionallycommitted criminal offence;

5) persons whose previous unlawful act or omission has resulted in the bank-ruptcy, compulsory dissolution or revocation of the activity licence of a com-pany;

6) bankrupts or persons who are subject to a prohibition on business or fromwhom the right to engage in economic activity has been taken away pursuantto law.

(3) Members of the management board shall not be public servants nor work forany other employer or in a structural unit or independent division of the Bank ofEstonia.

(4) The provisions of § 31, subsections 32 (1) and (2) and § 34 of this Act applyto members of the management board.

(5) Before a person is appointed as a member of the management board, he or sheshall submit the information specified in subsection 32 (3) of this Act to thesupervisory board in writing and confirmation that no circumstances exist whichaccording to this Act would preclude his or her appointment as a member of themanagement board. The member of the management board shall notify the super-visory board immediately of any changes in the information submitted.

§ 21. Term of authority of members of management board(1) The term of the authority of members of the management board shall be threeyears.

(2) The term of the authority of the member of the management board who is thechairman of the management board shall be four years.

(3) The authority of a member of the management board shall commence as ofthe date specified in the resolution concerning his or her appointment.

(4) The chairman of the supervisory board shall enter into contracts of servicewith the chairman and the members of the management board for the term oftheir authority and the contracts shall specify the rights and duties of the mem-bers of the management board and the remuneration for the performance of theduties of chairman or members of the management board.

104 Appendix 1

§ 22. Removal of member of management board(1) A member of the management board is removed before the expiry of his orher term of authority not later than within three months after receipt of a corre-sponding written application from the member.

(2) A member of the management board shall be immediately removed before theexpiry of his or her term of authority if:

1) a judgment of conviction made against him or her in a criminal matterenters into force;

2) he or she violates the provisions of subsection 32 (1) or (2) or § 34 of thisAct;

3) a bankruptcy order enters into force or a prohibition on business is appliedwith regard to him or her or the right to engage in economic activity is takenaway from him or her pursuant to law;

4) he or she does not comply with the requirements established by this Actfor members of the management board or submits false information con-cerning compliance with such requirements.

(3) A member of the management board may be removed before the expiry of hisor her term of authority if he or she suffers from an illness lasting for more thanfour months or if there is any other good reason due to which he or she is unableto perform his or her duties.

(4) Upon expiry of the term of the authority or the removal or death of a memberof the management board, the supervisory board shall appoint a new member ofthe management board within a reasonable period of time.

§ 23. Chairman of management board(1) The supervisory board shall elect the chairman of the management boardfrom among the members of the management board pursuant to the procedureprovided for in the rules for the activities of the supervisory board. In the absenceof the chairman of the management board, the duties of the chairman shall be per-formed by the eldest member of the management board unless otherwise orderedby a directive of the chairman of the management board.

(2) The chairman of the management board shall:

1) organise the activities of the management board;

2) call and chair the meetings of the management board and organise the tak-ing of minutes at the meetings;

3) organise the administration of the Supervisory Authority and the disclo-sure of the activities of the Supervisory Authority;

4) organise the accounting of the Supervisory Authority;

Appendix 1 105

5) decide on the making of expenditure necessary for the activities of theSupervisory Authority according to and to the extent of the budget approvedby the supervisory board;

6) enter into, amend, suspend and terminate employment contracts withemployees.

(3) The chairman of the management board shall represent the SupervisoryAuthority in court and in relations with other state agencies, the Bank of Estonia,other persons, international organizations for financial supervision, foreignfinancial supervision authorities and other competent foreign authorities, organ-izations and persons.

(4) On the basis of a resolution of the management board, the chairman of themanagement board shall issue authorization documents to other members of themanagement board, employees and third parties who represent the SupervisoryAuthority.

§ 24. Calling meetings of management board(1) Meetings of the management board shall be held when necessary but not lessfrequently than once a month.

(2) Meetings of the management board shall be called by the chairman of themanagement board on his or her own initiative or on the proposal of a member ofthe management board.

§ 25. Organisation of meetings of management board(1) Meetings of the management board shall be closed unless the chairman of themanagement board decides otherwise.

(2) Issues relating to meetings of the management board shall be provided for inthe rules for the activities of the management board, including:

1) the procedure for giving notice of meetings of the management board;

2) the procedure for communicating documents concerning the agenda of ameeting to the members of the management board;

3) the information to be recorded in the minutes of a meeting, including thecontent of the resolutions of the management board and issues relating to therecording of voting results;

4) the procedure for the adoption of resolutions of the managementboard without calling a meeting, the information to be recorded in recordsof votes and the procedure for preservation of draft resolutions and thepositions and dissenting opinions of the members of the managementboard.

106 Appendix 1

§ 26. Resolutions of management board(1) Each member of the management board has one vote. Members of the man-agement board do not have the right to abstain from voting or to remain unde-cided.

(2) A resolution of the management board is adopted if at least three members ofthe management board vote in favor.

(3) A member of the management board who votes against a resolution of themanagement board has the right to submit his or her dissenting opinion.

(4) A member of the management board shall give notice to the managementboard if his or her child, parent, sister, brother, spouse or cohabitee, or a child,parent, sister or brother of his or her spouse or cohabitee is a member of the man-agement body, procurator, other representative, head of the internal audit unit,chairman of the audit committee or auditor of or shareholder with a qualifyingholding in a relevant subject of financial supervision, or a person exercising dom-inant influence over the management of such company in any other manner or adirector or representative of an Estonian branch of a foreign company.

(5) Members of the management board specified in subsection (4) of this sectionmay participate in voting if all other members of the management board partici-pating in the vote are in favor thereof.

§ 27. Minutes of meetings of management board(1) Minutes shall be taken of meetings of the management board.

(2) Written dissenting opinions submitted by members of the management boardshall be annexed to the minutes. A notation shall be made in the minutes con-cerning the annexing of a dissenting opinion, and the member of the managementboard who submitted the opinion shall confirm the notation with his or hersignature.

(3) The chairman of the management board and the secretary shall sign theminutes.

(4) Minutes of meetings of the management board shall be preserved in theSupervisory Authority indefinitely.

§ 28. Adoption of resolutions without calling meeting(1) The management board has the right to adopt resolutions without calling ameeting of the management board if all members of the management board con-sent thereto and hold a certificate for giving digital signatures issued pursuant tothe Digital Signatures Act.

(2) Upon adoption of a resolution of the management board in the manner pro-vided for in subsection (1) of this section, all proposals, positions and decisionsshall be certified by digital signatures.

Appendix 1 107

(3) The chairman of the management board shall send a draft resolution to allmembers of the management board and specify the term by which the membersof the management board must present their positions. If a member of the man-agement board fails to present his or her position within the specified term, he orshe is deemed to have voted against the resolution.

(4) The provisions of § 26 of this Act apply to the adoption of resolutions.

(5) Minutes shall be taken of voting results and shall be sent immediately to allmembers of the management board.

§ 29. Liability of members of management board(1) Members of the management board shall be solidarily liable for any damagewrongfully caused by their unlawful behavior.

(2) A member of the management board is required to compensate the state forany damage caused by violation of his or her duties intentionally or through grossnegligence. Compensation claimed for damage caused through gross negligenceshall not exceed six times the monthly remuneration paid to the member of themanagement board.

(3) A member of the management board shall be released from liability if, uponadoption of a resolution which is in conflict with the law, he or she holds a posi-tion which is in accordance with the law and submits a corresponding dissentingopinion which is annexed to the minutes.

(4) The limitation period for a claim against a member of the management boardshall be three years as of the commission of the violation.

Chapter 3

Requirements for Employees

§ 30. Employees of Supervisory Authority(1) Employees of the Supervisory Authority (hereinafter employees) and mem-bers of the management board of the Supervisory Authority shall be subject tothe Republic of Estonia Employment Contracts Act (RT 1992, 15/16, 241; 1993,10, 150; RT I 1993, 26, 441; 1995, 14, 170; 16, 228; 1996, 3, 57; 40, 773; 45, 850;49, 953; 1997, 5/6, 32; 1998, 111, 1829; 1999, 16, 276; 60, 616; 2000, 25, 144;51, 327; 57, 370; 102, 669; 2001, 17, 78; 42, 233) and other labor laws unless oth-erwise provided by this Act.

(2) Persons may be employed by the Supervisory Authority if they have the nec-essary education, sufficient experience and professional qualifications to per-form their duties and an impeccable professional and business reputation.

108 Appendix 1

(3) The following shall not be employed:

1) persons under preliminary investigation for or accused of a criminaloffence or persons with a criminal record for criminal official misconduct;

2) persons whose previous unlawful act or omission has resulted in the bank-ruptcy, compulsory dissolution or revocation of the activity licence of acompany;

3) bankrupts or persons who are subject to a prohibition on business or fromwhom the right to work in a particular position or operate in a particular areaof activity has been taken away pursuant to law.

(4) Before an employment contract is entered into with a person applying foremployment, he or she is required to submit to the management board a writtenoverview of his or her education, qualifications, in-service training, professionalexperience and business activities, the information specified in subsection 32 (3)of this Act, and confirmation that no circumstances exist which according to thisAct would preclude his or her right to be an employee.

(5) Upon entry into an employment contract, a probationary period of up to sixmonths may be applied.

(6) An employment contract may be entered into with an employee for an unspec-ified term or for a term of up to five years.

§ 31. Duties of employees(1) An employee is required to perform his or her duties in good faith, adhere togood practice and act with the conscientiousness necessary for the exercise ofpublic authority, with the prudence and competence expected of him or her andaccording to the requirements for his or her position.

(2) An employee shall refrain from acts which are or may be detrimental to theobjectives, functions or reputation of the Supervisory Authority.

§ 32. Avoiding conflicts of interest(1) An employee shall not be a shareholder with a qualifying holding in a subjectof financial supervision, a person who exercises dominant influence over themanagement of such subject in any other manner or a member of the manage-ment body or a procurator thereof, a person who holds the right of representationon any other basis, or the auditor, head of the internal audit unit or chairman ofthe audit committee thereof, or a director or representative of an Estonian branchof a foreign company.

(2) An employee shall not enter into agreements with a subject of financial super-vision or persons specified in subsection (1) of this section according to whichthe employee is required to provide investment or consulting services.

(3) Before an employment contract is entered into with a person applyingfor employment with the Supervisory Authority, he or she shall, in the format

Appendix 1 109

established by the Minister of Finance, submit information to the managementboard concerning his or her proprietary obligations and those of his or her spouseor cohabitee, children and parents to subjects of financial supervision, and infor-mation concerning the securities owned by the abovementioned persons. Theemployee shall immediately notify the management board of any relevantchanges in the information submitted.

§ 33. Removal(1) An employee shall not participate in supervision proceedings or in the prepa-ration of a resolution of the management board if he or she is directly or indirectlypersonally interested in the matter.

(2) An employee is required to notify the chairman of the management boardimmediately if the circumstances specified in subsection (1) of this section existor if his or her child, parent, sister, brother, spouse or cohabitee, or a child, par-ent, sister or brother of his or her spouse or cohabitee is a member of the man-agement body, procurator, other representative, head of the internal audit unit,chairman of the audit committee or auditor of or shareholder with a qualifyingholding in a relevant subject of financial supervision, or a person exercising dom-inant influence over the management of such company in any other manner or adirector or representative of an Estonian branch of a foreign company.

(3) If the chairman of the management board has reasonable doubt about theimpartiality of an employee, the chairman has the right to remove the employeefrom supervision proceedings or the preparation of a resolution of the manage-ment board.

§ 34. Duty to maintain confidentiality(1) Unless otherwise provided by this Act, employees of the Supervisory Author-ity and the auditors, experts and other persons brought in by the SupervisoryAuthority to participate in the conduct of financial supervision are required tomaintain indefinitely the confidentiality of any confidential information whichthey may receive while performing their duties in the Supervisory Authority.

(2) Persons specified in subsection (1) of this section shall not use any confiden-tial information which they may receive while performing their duties for theirprivate interests.

Chapter 4

Financing

§ 35. Sources of financing(1) The expenses of the Supervisory Authority shall be covered from the com-pulsory payments made by the subjects of financial supervision pursuant to the

110 Appendix 1

provisions of this Act (hereinafter the supervision fee) and, in the case providedfor in § 45 of this Act, from the funds prescribed in the budget of the Bank ofEstonia and appropriations prescribed in the state budget.

(2) The supervision fee consists of the capital share and the share calculated onthe basis of assets.

§ 36. Financing obligation(1) The organisation specified in subsection 75 (1) of the Insurance Activities Act(hereinafter Lloyd’s), investment firms, insurers, insurance brokers, credit insti-tutions and management companies shall pay a supervision fee in the amount ofthe capital share and the share calculated on the basis of assets.

(2) The registrar of the Estonian Central Register of Securities, operators of clear-ing and settlement systems and operators of regulated securities markets shall paya supervision fee only in the amount of the capital share.

(3) Unless otherwise provided by this Act, an Estonian branch of a foreign com-pany, operating in the area of activity of an investment firm, insurer, insurancebroker, credit institution or management company, shall pay a supervision feeonly in the amount of the share calculated on the basis of assets.

(4) The financing obligation provided for in subsections (1)–(3) of this section(hereinafter the financing obligation) of the persons specified in those subsec-tions or of an Estonian branch of a foreign company operating in the correspon-ding area of activity arises as of the entry of the corresponding area of activity ofthe person or branch in the commercial register. The financing obligation of aninsurance broker arises as of the entry of the insurance broker in the list of insur-ance intermediaries.

(5) The financing obligation of a person specified in subsections (1)–(3) of thissection or an Estonian branch of a foreign company expires upon the expiry ofthe corresponding right to operate and the financing obligation of an insurancebroker expires upon the deletion of the broker from the list of insurance interme-diaries.

(6) Upon the expiry of a financing obligation, the supervision fee shall not berefunded.

§ 37. Rate of supervision fee(1) The capital share of the supervision fee is an amount equal to one per cent of:

1) the minimum amount of the net own funds required pursuant to legislationin the case of a credit institution;

2) the highest amount of minimum own funds required pursuant to legisla-tion in order to engage in the class of insurance specified in the activitylicence, in the case of an insurer;

Appendix 1 111

3) the highest amount of minimum own funds required pursuant to legisla-tion in the case of the Estonian Central Register of Securities or an operatorof a clearing and settlement system;

4) the highest amount of minimum share capital required pursuant to legis-lation in order to operate in the area of activity specified in the activitylicence, in the case of an investment firm, operator of a regulated securitiesmarket or a management company;

5) the minimum amount of share capital required pursuant to legislation inthe case of an insurance broker;

6) the amount provided for in clause 75 (6) 3) of the Insurance Activities Actin the case of Lloyd’s.

(2) The share of the supervision fee calculated on the basis of assets is an amountequal to:

1) in the case of a credit institution or an Estonian branch of a foreign com-pany operating as a credit institution, 0.01 to 0.05 per cent of the assets of thecredit institution or the corresponding Estonian branch;

2) in the case of an investment firm or an Estonian branch of a foreign com-pany operating as an investment firm, 0.4 to 0.75 per cent of the assets of theinvestment firm or the corresponding Estonian branch;

3) in the case of a management company or an Estonian branch of a foreigncompany operating as a management company, 0.05 to 0.25 per cent of theassets managed by the management company or the corresponding Estonianbranch;

4) in the case of an insurer providing non-life insurance or reinsurancethereof or an Estonian branch of a foreign company operating as an insurerproviding non-life insurance or reinsurance thereof, 0.1 to 0.5 per cent of thegross insurance premiums earned by the insurer or the corresponding Eston-ian branch. Reinsurance premiums paid to an insurer shall not be included inthe total of the insurance premiums if, according to the reinsurance contract,the ceding company is an insurer registered in Estonia;

5) in the case of an insurer providing life insurance or reinsurance thereof oran Estonian branch of a foreign company operating as an insurer providinglife insurance or reinsurance thereof, 0.05 to 0.25 per cent of the calculatedassets of the insurer or the corresponding Estonian branch.

6) in the case of an insurance broker or an Estonian branch of a foreign com-pany operating as an insurance broker, 1 to 5 per cent of the gross income fromthe commissions received by the insurance broker or the Estonian branch;

7) in the case of Lloyd’s, 0.1 to 0.5 per cent of the gross insurance premiumsearned by Lloyd’s in Estonia.

112 Appendix 1

(3) For the purposes of this Act, assets are taken to be total assets indicated on thebalance sheet as provided by legislation.

(4) For the purposes of this Act, calculated assets are taken to be the total amountof assets and gross insurance premiums.

§ 38. Establishment of rate of share of supervision fee calculated on basis of assets(1) The rate of the share of the supervision fee calculated on the basis of assetsshall be established for a calendar year as a percentage within the limits providedfor in subsection 37 (2) of this Act. The rate shall be established by a regulationof the Minister of Finance within ten days after approval of the budget of theSupervisory Authority by the supervisory board.

(2) The rate of the share of the supervision fee calculated on the basis of assetsshall be the same for all persons and Estonian branches of foreign companiesoperating in the same area of activity.

(3) The rate of the share of the supervision fee calculated on the basis of assetsshall be applied to calculation of the advance payment and final payment of thesupervision fee.

§ 39. Calculation of advance payment of supervision fee on basis of assets and gross insurance premiums(1) In the case of a credit institution, investment firm or management company,the advance payment of the share of the supervision fee calculated on the basis ofassets shall be calculated on the basis of the arithmetic mean of the assets of theperson or the corresponding Estonian branch of a foreign company, calculatedaccording to the data on the balance sheet thereof as at 31 December of the pre-ceding year and 31 March and 30 June of the current year.

(2) In the case of an insurer providing life-insurance or reinsurance thereof, theadvance payment of the share of the supervision fee calculated on the basis ofassets shall be calculated on the basis of the arithmetic mean of the calculated assetsof the person or the corresponding Estonian branch of a foreign company, calcu-lated according to the data in the balance sheet and income statement thereof as at31 December of the preceding year and 31 March and 30 June of the current year.

(3) In the case of Lloyd’s, an insurance broker or an insurer providing non-lifeinsurance or reinsurance thereof, the advance payment of the share of the super-vision fee calculated on the basis of assets shall be calculated on the basis oftwice the amount of the gross insurance premiums earned by the person or thecorresponding Estonian branch of a foreign company according to the data pre-sented in the half yearly income statement of the person or branch.

(4) In the event of dissolution, calculation shall be based on the balance sheet pre-pared upon liquidation.

Appendix 1 113

§ 40. Calculation of final payment of supervision fee on basis of assets andgross insurance premiums(1) In the case of a credit institution, investment firm or management company,the final payment of the share of the supervision fee calculated on the basis ofassets shall be calculated on the basis of the arithmetic mean of the assets of theperson or the corresponding Estonian branch of a foreign company, calculatedaccording to the data on the balance sheet thereof as at 31 March, 30 June, 30September and 31 December of the preceding year.

(2) In the case of an insurer providing life-insurance or reinsurance thereof, thefinal payment of the share of the supervision fee calculated on the basis of assetsshall be calculated on the basis of the arithmetic mean of the calculated assets ofthe person or the corresponding Estonian branch of a foreign company, calculatedaccording to the data in the balance sheet and income statement thereof as at 31March, 30 June, 30 September and 31 December of the preceding year.

(3) In the case of Lloyd’s, an insurance broker or an insurer providing non-lifeinsurance or reinsurance thereof, the final payment of the share of the supervi-sion fee calculated on the basis of assets shall be calculated on the basis of thegross insurance premiums earned by the person or the corresponding Estonianbranch of a foreign company according to the data presented in the previousyear’s income statement of the person or branch.

(4) If a financing obligation arises during a calendar year, the final payment ofthe share of the supervision fee calculated on the basis of assets payable for theforthcoming budgetary year shall be calculated on the basis of the assets, calcu-lated assets or gross insurance premiums provided for in subsections (1)–(3) ofthis section as at 31 December.

(5) In the event of dissolution, calculation shall be based on the balance sheet pre-pared upon liquidation.

§ 41. Payment of supervision fee(1) Payment of the supervision fee shall be requested in a corresponding noticesent by the Supervisory Authority.

(2) The supervision fee shall be paid as an advance payment and final payment.The size of the final payment of the supervision fee shall be the final amount ofthe supervision fee to be paid during a particular budgetary year of the Supervi-sory Authority (hereinafter budgetary year) for that year.

(3) If an advance payment of the supervision fee exceeds the final payment, theSupervisory Authority shall refund the overpaid amount of the supervision fee bythe due date provided for in subsection 42 (2) of this Act.

(4) If an advance payment of the supervision fee is less than the final payment, afinal payment in the amount of the difference between the final payment and the

114 Appendix 1

advance payment shall be made by the due date provided for in subsection 42 (2)of this Act.

(5) If a financing obligation arises during the first half of a calendar year, the finalpayment of the supervision fee shall be made only in the full amount of the cap-ital share. As an exception, an Estonian branch of a foreign company, operatingin the area of activity of an investment firm, insurer, insurance broker, creditinstitution or management company, shall pay the final amount of the supervisionfee only in the amount of half the capital share.

(6) If a financing obligation arises during the second half of a calendar year, thefinal payment of the supervision fee shall be made only in the amount of half thecapital share. As an exception, an Estonian branch of a foreign company, operat-ing in the area of activity of an investment firm, insurer, insurance broker, creditinstitution or management company, shall pay the final amount of the supervisionfee only in the amount of one-quarter of the capital share.

(7) The supervision fee shall be paid into the account of the Supervisory Author-ity in the Bank of Estonia.

§ 42. Term for payment of supervision fee(1) Any advance payment of the share of the supervision fee calculated onthe basis of assets which is payable for a budgetary year shall be made by31 December of the preceding year.

(2) The final payment of the share of the supervision fee calculated on the basisof assets shall be made by 1 September of the budgetary year.

(3) The capital share of the supervision fee shall be paid in two equal parts by31 December of the year preceding the budgetary year and by 30 June of thecurrent budgetary year.

(4) If a financing obligation arises during the current year, the capital share of thesupervision fee shall be paid within 30 days after the obligation has arisen.

§ 43. Consequences of failure to pay supervision fee(1) If a person fails to pay the supervision fee to the Supervisory Authority by thedue date provided for in § 42 of this Act or fails to pay the fee in full, the Super-visory Authority shall send a claim for enforcement to the relevant agency, bodyor person. Enforcement proceedings with regard to such decision shall be com-menced immediately after service of the enforcement document on the personwho failed to pay the supervision fee in part or in full.

(2) Enforcement proceedings commenced on the basis of subsection (1) of thissection may be suspended, enforcement may be extended or postponed and themethod of and procedure for the enforcement may be amended only on the basisof a court judgment which has entered into force or a petition of the claimant.

Appendix 1 115

§ 44. Budgetary year of Supervisory AuthorityThe budgetary year of the Supervisory Authority begins on 1 January and endson 31 December.

§ 45. Supplementary budget of Supervisory Authority(1) A supplementary budget shall be drawn up if the budgetary funds are not suf-ficient to cover the extraordinary expenses incurred by the Supervisory Author-ity during a budgetary year.

(2) A draft supplementary budget shall be drawn up by the management boardwho shall submit the draft to the supervisory board for approval.

Chapter 5

Co-operation

§ 46. Co-operation with international organizationsThe Supervisory Authority shall participate in and co-operate with internationalorganizations within the limits of its competence.

§ 47. Co-operation with foreign financial supervision authorities(1) The Supervisory Authority shall co-operate with foreign financial supervi-sion authorities and other competent foreign bodies or persons.

(2) The Supervisory Authority has the right to send confidential information nec-essary for the performance of its functions to the subjects of co-operation speci-fied in subsection (1) of this section and to obtain such information therefromand exchange such information therewith. Information sent, received orexchanged in this manner is deemed to be confidential.

(3) The Supervisory Authority has the right to communicate confidential infor-mation to a foreign financial supervision authority or other competent foreignbody or person only if the receiver of the confidential information is obliged tomaintain the confidentiality of the information received and the information isused only for the purposes of financial supervision. The Supervisory Authoritymay use information received on the basis of subsection (2) of this section onlyfor the purposes of financial supervision.

(4) Information received as a result of the co-operation specified in subsection(1) of this section may be disclosed in the cases provided for in clauses 54 (4)1)–6) of this Act if a corresponding agreement has been entered into with theforeign financial supervision authority or other competent foreign authority orperson.

116 Appendix 1

§ 48. Provision of information(1) The Supervisory Authority has the right to obtain information necessary forthe performance of its functions from the Bank of Estonia, the Ministry ofFinance and other state agencies.

(2) The Supervisory Authority is required to provide the Bank of Estonia and theMinistry of Finance with information necessary for the performance of theirfunctions.

§ 49. Co-operation of Supervisory Authority with Bank of Estonia, Min-istry of Finance and other state agencies in field of legislative drafting(1) The Supervisory Authority shall submit a report on the effects and applicationof legislation relating to the financial sector and financial supervision to the Gov-ernment of the Republic and the Bank of Estonia by 1 October each year.

(2) The Supervisory Authority has the right to submit proposals to the Bank ofEstonia, the Ministry of Finance and other state agencies concerning the drafting,amendment and repeal of legislation.

(3) If a legal act to be drafted or amended by the Bank of Estonia, the Ministry ofFinance or any other state agency regulates the activities of a subject of financialsupervision or the Supervisory Authority or has any other impact on the attain-ment of the objectives of financial supervision, the draft act shall be co-ordinatedwith the Supervisory Authority.

§ 50. Co-operation agreements(1) The Supervisory Authority may enter into a bilateral or multilateral agree-ment for co-operation with the Bank of Estonia, the Ministry of Finance or anyother state agency if such co-operation is necessary to promote attainment of theobjectives of financial supervision.

(2) The Supervisory Authority, the Ministry of Finance and the Bank of Estoniashall, on the basis of a written agreement, co-operate in the collection and analysisof reporting, the drafting of legislation and the exchange of information in the caseof events which have a substantial impact on the situation in the financial sector.

Chapter 6

Reporting and Disclosure of Activities

§ 51. Annual report(1) The annual report of the Supervisory Authority consists of the managementreport, the statement of revenue and expenditure, and the auditor’s report.

(2) The supervisory board shall approve the annual report of the SupervisoryAuthority within three months as of the end of the budgetary year.

Appendix 1 117

(3) The statement of revenue and expenditure of the Supervisory Authority shallbe audited by an auditor of the Bank of Estonia.

(4) The annual report of the Supervisory Authority approved by the supervisoryboard shall be submitted to the Riigikogu2 together with the annual report of theBank of Estonia. The Riigikogu shall hear the report of the chairman of the man-agement board concerning the annual report of the Supervisory Authority pur-suant to the procedure prescribed by the Riigikogu Rules of Procedure Act (RT I1994, 90, 1517; 2001, 1, 1).

§ 52.Yearbook of Supervisory Authority(1) Every year, the Supervisory Authority shall publish a yearbook of the Super-visory Authority.

(2) The yearbook of the Supervisory Authority shall contain the annual report ofthe Supervisory Authority approved by the supervisory board, a list of the advi-sory guidelines issued by the Supervisory Authority and the relevant explana-tions, and a summary report of the activities of the subjects of financial supervi-sion during the previous calendar year.

§ 53. Disclosure of activities of Supervisory Authority(1) The Supervisory Authority shall publish the resolutions of the supervisoryboard on its web site. Resolutions containing information specified in clauses 7(2) 7) or 8) or subsection 54 (2) of this Act, with the exception of informationconcerning circumstances relating to the termination of the contract of service ofthe chairman of the management board, are not public information.

(2) Resolutions of the management board are not public information and theyshall be disclosed only in the cases and pursuant to the procedure provided in theActs specified in § 2 of this Act.

(3) The advisory guidelines issued by the Supervisory Authority on the basis of§ 57 of this Act shall be published on its web site.

(4) The Supervisory Authority shall publish the lists provided for in the Actsspecified in subsection 2 (1) of this Act and other information subject to disclo-sure on its web site.

§ 54. Confidentiality of information received during supervision(1) Proceedings conducted by the Supervisory Authority for the conduct of finan-cial supervision shall not be public.

(2) Information obtained in the course of financial supervision from the subjectsof financial supervision or other persons or agencies, including data, documentsand other information, certificates, reports and precepts prepared in the course of

2 Riigikogu = the parliament of Estonia

118 Appendix 1

financial supervision, and other documents and any type of data media contain-ing information on the results of financial supervision shall be confidential.

(3) Information is not confidential if it has been published pursuant to the proce-dure prescribed in the Acts specified in subsection 2 (1) of this Act or legislationestablished on the basis thereof or if the information disclosed does not enabledata concerning specific persons to be ascertained.

(4) Confidential information specified in subsection (2) of this section anddocuments containing information on the results of financial supervision may bedisclosed to:

1) courts and investigative bodies in connection with acts detected duringfinancial supervision or the acts of a subject of financial supervision or thehead or an employee thereof if such acts contain elements of a criminal offence;

2) administrative courts in matters relating to the conduct of financialsupervision;

3) employees of the Bank of Estonia and public servants of the Ministry ofFinance if this is necessary for the performance of their duties, on the condi-tion that they are required to maintain professional secrets pursuant to law;

4) a court, liquidator of a subject of financial supervision, interim trustee ortrustee in bankruptcy in the liquidation or bankruptcy proceedings of a sub-ject of financial supervision, and to a moratorium administrator of a creditinstitution or special regime trustee of an insurance company to the extentnecessary for the performance of their duties;

5) the Deposit Guarantee Fund to the extent necessary for the performanceof its functions;

6) the auditor of a subject of financial supervision to the extent necessary forthe activities of the auditor;

7) a foreign financial supervision authority in the case specified in § 47 ofthis Act.

Chapter 7

Legal Acts and Liability

§ 55. Resolutions and precepts of management board(1) The management board shall adopt resolutions and issue precepts on the basesand pursuant to the procedure provided for in this Act and the Acts specified in §2 of this Act.

(2) An appeal may be filed with an administrative court against a resolution orprecept of the management board or a financial supervision operation on thebases and pursuant to the procedure prescribed by law.

Appendix 1 119

§ 56. Precepts of chairman of management boardThe chairman of the management board shall issue directives to regulate mattersrelating to the internal organization of the activities and the management of theSupervisory Authority.

§ 57. Guidelines of Supervisory Authority(1) The Supervisory Authority has the right to issue advisory guidelines toexplain legislation regulating the activities of the financial sector and to provideguidance to subjects of financial supervision.

(2) The Supervisory Authority has the right to involve experts and representativesof the subjects of financial supervision in the drafting of advisory guidelines.

(3) The advisory guidelines of the Supervisory Authority shall be approved by aresolution of the management board and the guidelines shall be disclosed as pro-vided for in subsection 53 (3) of this Act.

§ 58. Liability of Supervisory Authority(1) The liability of the Supervisory Authority for rights violated or damagecaused in the conduct of financial supervision, and the bases of and procedure forthe restoration of violated rights and the payment of compensation for damagecaused shall be provided by law.

(2) The Supervisory Authority shall be liable for damage not related to the con-duct of financial supervision pursuant to the provisions of private law and withinthe limits of the funds prescribed in its budget. If the funds prescribed in thebudget of the Supervisory Authority are not sufficient, the damage shall be com-pensated for by the Bank of Estonia.

Chapter 8

Implementing Provisions

§ 59. Commencement of activities of Supervisory AuthorityThe Supervisory Authority shall commence activities on 1 January 2002.

§ 60.Appointment of members of supervisory board and management board

(1) The Government of the Republic and the Board of the Bank of Estonia shallappoint the members of the supervisory board within one month after the entryinto force of this Act.

(2) The Minister of Finance shall call the first meeting of the supervisory boardwithin twenty days after all members of the supervisory board have beenappointed.

120 Appendix 1

(3) The agenda of the first meeting of the supervisory board shall include at leastthe election of the chairman of the management board from among the personsspecified in subsection 61 (1) of this Act.

(4) The supervisory board shall appoint the members of the management boardpursuant to the procedure provided by this Act not later than by 30 June 2002.

§ 61. Commencement of activities of Supervisory Authority(1) The Director General of the Securities Inspectorate, the Director General ofthe Insurance Supervisory Authority and the Head of the Banking Supervision ofthe Bank of Estonia, or the persons performing their duties, shall perform theduties of a member of the management board provided by this Act if, by 10 June2001, they have granted corresponding written consent to the person or body whoappointed them. If one of the aforementioned persons refuses to consent, he orshe shall be released from service on the basis of § 116 of the Public Service Act(RT I 1995, 16, 228; 1999, 7, 112; 10, 155; 16, 271 and 276; 2000, 25, 144 and145; 28, 167; 102, 672; 2001, 7, 17 and 18; 17, 78; 42, 233) or the employmentcontract with him or her shall be terminated on the basis of clause 86 3) of theRepublic of Estonia Employment Contracts Act.

(2) The term of the authority of the persons specified in subsection (1) of this sec-tion commences on the day following the date of the first meeting of the super-visory board and ends upon commencement of the term of the authority of themembers of the management board pursuant to the procedure provided for in sub-section 21 (3) of this Act.

(3) Until the term of the authority of the members of the management board pro-vided for in subsection 60 (4) of this Act commences, the management boardshall consist of three members.

(4) The management board consisting of the persons specified in subsection (1)of this section (hereinafter the management board) has a quorum if all membersof the management board are present. A resolution of the management board isadopted if at least two members of the management board vote in favor.

(5) The management board shall, pursuant to the procedure established by thesupervisory board, report to the supervisory board on the implementation of theaction plan for commencement of the activities of the Supervisory Authority.

§ 62. Continuation or termination of service or employment relationships(1) Officials of the Securities Inspectorate and the Insurance Supervisory Author-ity and employees of the Banking Supervision of the Bank of Estonia who meetthe requirements for employees provided by this Act and who submit a corre-sponding application to the management board by 1 November 2001 shall beemployed by the Supervisory Authority as of 1 January 2002. In such case, the

Appendix 1 121

service relationship of an official of the Securities Inspectorate or the InsuranceSupervisory Authority shall be deemed to terminate as of 31 December 2001 onthe basis of § 114 of the Public Service Act.

(2) Officials of the Securities Inspectorate and the Insurance Supervisory Author-ity and employees of the Banking Supervision of the Bank of Estonia who do notmeet the requirements for employees provided by this Act or who do not submitthe application specified in subsection (1) of this section shall be released fromservice on the basis of § 116 of the Public Service Act or the employment con-tracts with such persons shall be terminated on the basis of clause 86 3) of theRepublic of Estonia Employment Contracts Act.

(3) The length of service of a person at the Financial Supervisory Authority shallbe calculated as of the commencement of his or her employment or service at theBank of Estonia, the Insurance Supervisory Authority or the Securities Inspec-torate.

§ 63. Transfer of assets and performance of proprietary obligations(1) State assets in the possession and at the disposal of the Securities Inspectorateor the Insurance Supervisory Authority which are necessary for the activities ofthe Supervisory Authority shall be transferred by the administrator of state assetsto the Supervisory Authority free of charge not later than by 1 January 2002.

(2) The state shall be liable with the budgetary funds thereof for proprietary obli-gations which arise out of the activities of the Securities Inspectorate or the Insur-ance Supervisory Authority before 1 January 2002, and the Bank of Estonia shallbe liable with the budgetary funds thereof for proprietary obligations which ariseout of the activities of the Banking Supervision of the Bank of Estonia before 1January 2002.

§ 64. Application of Act(1) Administrative matters and administrative offence matters which are subjectto proceeding by the Securities Inspectorate, the Insurance Supervisory Author-ity or the Banking Supervision of the Bank of Estonia on 1 January 2002 andpetitions which have been submitted but not accepted by that date shall be trans-ferred to the Supervisory Authority who shall conclude the proceedings pursuantto this Act and the Acts specified in subsection 2 (1) of this Act.

(2) In matters arising from the conduct of supervision over securities markets orinsurance activities, which are subject to court proceeding as at 1 January 2002and in which the state is represented by the Securities Inspectorate or the Insur-ance Supervisory Authority on the basis of law or general or special authoriza-tion or in which one of the participants in the proceedings is the Bank of Estoniain a dispute concerning the exercise of banking supervision, the state shall be

122 Appendix 1

thereafter represented by the Supervisory Authority or the Supervisory Authorityshall substitute for the Bank of Estonia as a participant in the proceedings.

(3) Activity licenses and authorisations, other permits and administrative legisla-tion of specific application issued by competent bodies on the basis of an Actspecified in § 2 of this Act before the commencement of the activities of theSupervisory Authority shall be valid until the expiry thereof or until their revo-cation.

(4) In 2002 and 2003, the expenses of the Supervisory Authority may be partiallycovered from the funds prescribed in the budget of the Bank of Estonia or fromthe appropriations prescribed in the state budget.

(5) If the expenses of the Supervisory Authority are partially covered on the basisof subsection (4) of this section, rates of the supervision fee lower than the ratesprovided for in § 37 of this Act may be applied.

§ 65. Information relating to supervision activities(1) Information relating to the supervision activities of the Securities Inspec-torate, the Insurance Supervisory Authority or the Banking Supervision of theBank of Estonia which is recorded or documented in any manner on any datamedia shall be transferred to the Supervisory Authority.

(2) A member of the management board or an employee of the SupervisoryAuthority may disclose confidential information obtained in the course of thesupervision activities of the Securities Inspectorate, the Insurance SupervisoryAuthority or the Banking Supervision to other members of the managementboard or employees of the Supervisory Authority if this is necessary for the per-formance of their duties.

§ 66. Entry into force of Act(1) This Act enters into force on 1 June 2001.

(2) Clauses 7 (2) 4)–7), subsection 14 (5), subsection 18 (2), clauses 18 (3) 3), 4),8), 10) and 13)–15), §§ 20–22, 29, 51 and 52, subsection 53 (3) and §§ 54, 55, 57and 58 of this Act enter into force on 1 January 2002.

(3) Subsection 53 (4) of this Act enters into force on 1 July 2002.

123

A P P E N D I X 2

The Hungarian Financial Supervisory Authority Act, 1999*

Chapter I

The Legal Status, Powers and Tasks of the HungarianFinancial Supervisory Authority

Article 1(1) The Hungarian Financial Supervisory Authority (hereinafter: Supervision) isa national public administration organisation, operating under direction by theGovernment, supervised by the Minister of Finance.

(2) The Supervision is a budget agency endowed with budget chapter manage-ment powers, the budget of which is separated within the chapter of the Ministryof Finance.

(3) The Supervision shall be headquartered in Budapest.

(4) Tasks for the Supervision may be assigned only by law or by legislationdrafted on the basis of authorisation granted in a law. The Supervision may notbe instructed in terms of its tasks specified in laws.

Article 2(1) The aim of the Supervision’s activities shall be to promote and monitor theundisturbed and effective operation of the money and capital market, the protec-tion of the interests of financial organisations’ clients, the transparency of marketconditions, the strengthening of confidence in financial markets, and in order tomaintain fair market competition, to promote and monitor the prudent and effi-cient operation of organisations or persons pursuing financial service, auxiliaryfinancial service, clearing house, investment management, commodity exchangeservice, insurance, insurance brokerage, insurance consulting activities, volun-tary mutual insurance funds, private pension funds, public warehouses, venturecapital companies, venture capital funds, venture capital fund managers as wellas exchanges and their members (hereinafter collectively: financial organisa-tions) and the careful exercising of rights by the owners of the above.

* Unofficial translation, available at, <http://www.pszaf.hu/english/intro/laws.htm>.

124 Appendix 2

(2) The Supervision will continuously monitor compliance with the legislationand Supervision regulations applicable to the operation of financial organisa-tions, and shall have the power to take measures specified in separate law and willpropose proceedings to other organisations having the relevant powers in casesuch regulations—particularly the requirements concerning money laundering,insider trading, unfair price manipulation—are violated.

Article 3The scope of the power of the Supervision shall extend to the supervision oforganisations, persons and activities covered by:

a) Act No. CXII of 1996 on credit institutions and financial enterprises (here-inafter: Hpt);

b) Act CXX of 2001 on capital markets (hereinafter: Tpt.)

c)

d)

e) Act XCVI of 1995 on insurance companies and insurance activities (here-inafter: Bit);

f) Act XCVI of 1993 on Mutual Voluntary Insurance Funds;

g) Act LXXXII of 1997 on private pension and private pension funds;

h) Act XLVIII of 1996 on public warehousing;

i) the various acts on certain specialised credit institutions;

j) Act XXXIV of 1998 on venture capital investments and venture capital funds.

Article 4(1) The Supervision shall perform all of the responsibilities assigned to it by thelaw or by any statute issued under authorisation by the law.

(2) The provisions of Act No. IV of 1957 on the general rules of public adminis-tration proceedings shall be applied to the procedures of the Supervision with thedifferences laid out herein and in the acts listed in art 3.

(3) Resolutions made by the Supervision may not be altered, modified orannulled within supervisory powers and there is no appeal against them throughpublic administration procedures.

(4) The Supervision shall have the right to comment in the course of preparinglegislation involving the finance system and the institutions and persons super-vised, and will make proposals on the drafting of legislation. The Supervision’scomments shall be sought in respect of drafts of decisions and legislation involv-ing the finance system and the supervised institutions.

(5)

Appendix 2 125

(6) Claim for damages may be enforced against the Supervision—on account ofits resolutions made by the Supervision as an authority—only if the resolution orfailure of action on the part of the Supervision has violated the law and the dam-age suffered by such claimant has been directly caused by the resolution or fail-ure of the Supervision.

(7) The President of the Supervision may issue guidelines covering the basic princi-ples of legal enforcement applied by the Supervision.The guidelines have no legallybinding obligation in regard of organizations, persons subjected toActs listed underArticle 3, its purpose is to enhance the predictability of legal enforcement.

International co-operation

Article 5(1) The Supervision may perform co-operation agreements and may exchangeinformation with foreign financial supervision agencies in order to perform itstasks and to promote the implementation of consolidated supervision as well asintegration processes.

(2) The Supervision may join international organisations promoting the interna-tional co-operation between financial supervision agencies as a member.

(3) The Supervision may use individual data and information received from for-eign financial supervision agencies in the course of international co-operationonly for the following purposes and may release data to foreign financial super-vision agencies only for the following purposes:

a) for evaluating applications for the licencing of establishment or operation offinancial organisations and for verifying the contents of licences, for evaluatingthe prudent operation of organisations,

b) for use as grounds for the Supervision’s resolutions, particularly actions orsanctions.

(4) Individual data and information provided or obtained in the framework of co-operation between supervision agencies may be disclosed to third parties onlywith the prior written consent of the supervision that provided the data.

(5) Supervision information and data may be released to foreign supervisionagencies only if the foreign partner is able to guarantee appropriate legal protec-tion that is at least equivalent to Hungarian regulations for handling the informa-tion provided to it.

Disclosure of resolutions

Article 6(1) While observing bank and securities secrecy, fund secrecy, insurance secrecyand business secret the Supervision shall be entitled to disclose parts or the whole

126 Appendix 2

of its resolutions in the Financial Gazette (Pénzügyi Közlöny) and in other modesconsidered by the Supervision as expedient, in order to ensure the protection ofthe participants of the money and capital market, investors, deposit holders,insureds or members of funds.

(2) In the Financial Gazette the Supervision shall regularly disclose

a) the list of entities holding operating licences issued by the Supervision;

b) the list of foreign supervisory authorities with which the Supervision has con-cluded co-operation agreements based on mutual recognition.

Chapter II

The Supervision’s Relationships with Other Organizations

Relationship with the Parliament

Article 6/AThe President of the Supervision shall inform the competent committee of theParliament—following the report provided to the Government—each year aboutthe Supervision’s activities.

Relationship with the Government and Ministries

Article 6/B(1) The President of the Supervision shall report to the Government about theSupervision’s authorities by the 30 September of each year, and will publishinformation on the Supervision’s operation at the same time.

(2) The President of the Supervision shall be invited to attend the Government’ssessions in respect of agenda items concerning the Supervision’s tasks.

Relationship with the National Bank of Hungary

Article 6/C (1) In the course of performing its tasks the Supervision shall co-operate with theNational Bank of Hungary (hereinafter: NBH).

(2) In the cases specified by law the Supervision shall issue or withdraw licencesafter requesting preliminary opinion or agreement from NBH.

Chapter III

Executives and Employees of the Supervision

Article 7(1) The Supervision is headed by the President who has two Deputy Presidents.

Appendix 2 127

(2) The President of the Supervision will be elected for a period of six years orrecalled by the Parliament on the Prime Minister’s proposal. The competent com-mittee of the Parliament will hear the person proposed. The two Deputy Presi-dents of the Supervision will be appointed for a period of six years or releasedfrom office by the Prime Minister. The proposal concerning appointment orreleasing from office will be made by the President of the Supervision, andsubmitted to the Prime Minister by the Minister of Finance (if he agrees to theproposal).

(3) In respect of the President and Deputy President of the Supervision the rightsof the employer shall be exercised by the Minister of Finance on behalf of theGovernment, with the exception as per paragraph (2).

(4) The appointment of the Supervision’s President will be terminated:

a) when the term of appointment expires

b) with resignation

c) with recalling from office

d) when a conflict of interest is established

e) by death.

(5) Resignation shall be communicated in writing to the President of the Parlia-ment and to the Prime Minister.

(6) The appointment

a) may be terminated by recalling if the President of the Supervision is notable to perform his tasks arising out of his appointment for a reason that maynot be attributed to him

b) shall be terminated by recalling if the President of the Supervision fails toperform his tasks arising out of his appointment for a reason that is attribut-able to him or a final and enforceable court verdict finds that he has com-mitted an act of crime.

(7) If the appointment of the Supervision’s President is terminated by recalling,the reasons for recalling shall be communicated to the public.

(8) If the reason for conflict of interest set out in Article 10 exists in connectionwith the Supervision’s President he shall terminate it within 10 days of hisappointment. He may not exercise his powers arising out of his position until thistakes place.

(9) If the Supervision’s President fails to perform the obligation set out in section(8) by the deadline specified above the Parliament will establish that there is aconflict of interest in a resolution.

(10) Section (4) of this Article—except for sub-section d) of that section—and sections (6) and (7) shall apply also in respect of the Supervision’s

128 Appendix 2

Deputy Presidents with the difference that recalling shall read as releasingfrom office and the resignation shall be communicated in writing to the PrimeMinister.

(11) With the exceptions stipulated in this Act, the provisions set forth in the fre-quently amended Act XXIII of 1992 on the Legal Status of Civil Servants (here-inafter by the Hungarian abbreviation: Ktv.) shall be observed with regard to thePresident, the Deputy Presidents and the Supervision’s staff, whereby

a) for the purposes of sub-section b) of Section (1) of Article 8 and Section(2) of Article 30/A of Ktv., employment with a financial organization super-vised by the Supervision shall be recognized as administrative experience;

b) the percentage specified in Section (1) of Article 30/A of Ktv. shall bethirty-five percent;

(12) The Supervision may appoint managing directors as well, providing that amanaging director shall be a person in a position ranking as head of department,carrying out the tasks of the management of several departments.

Article 8The President of the Supervision shall

a) direct the working organisation of the Supervision;

b) exercise the rights of the employer in respect of the employees of theSupervision;

c) direct the financial management of the Supervision;

d) represent the Supervision;

e) perform the tasks assigned to his scope of competency by law or by theorganisation and operation rules of the Supervision.

f) participates—with the right of consulting—at the meetings of Governmentdiscussing issues relating to the responsibilities of the Supervision.

Article 9(1) The requirements to be met by the person to be elected/appointed President orDeputy President of the Supervision include higher academic qualification in rel-evant fields and at least five years of managerial (executive) working experienceacquired in a financial organisation or in public administration in the regulationor controlling of financial organisations, or equivalent working experienceacquired abroad.

(2) Higher academic qualifications in relevant fields include degree obtained atthe university of political sciences and law, university of economics, college ofstate administration or college of finance and accounting.

Appendix 2 129

Revenue of the President and Deputy Presidents of the SupervisionArticle 9/A

(1) The total annual revenue of the Supervision’s President shall correspond tothe total revenue of NBH’s President received from NBH.

(2) The total annual revenue for Deputy Presidents shall correspond to eighty percent of the total revenue of NBH’s President received from NBH.

Supervision Council

Article 9/B(1) The Supervision Council is an advisory body for the President having fifteenmembers. Sessions of the Council will be chaired by the Supervision’s President.

(2) The Supervision’s President will appoint council members based on consul-tations with the Minister of Finance in respect of one-third of members and withthe professional associations representing the sector supervised in respect oftwo-thirds of members, out of persons having outstanding theoretical and practi-cal professional knowledge of the issues related to the activities of financialorganisations.

(3) The Supervision Council will express its positions on the issues of principlerelevant for the strategic further development and the Supervision as well as ofthe regulation and its application and further development.

(4) The members shall be appointed for 3 years.

Conflict of interest

Article 10(1) No legal relationship of civil service may be established at the Supervision ifthe civil servant concerned would thereby establish a relationship of governance(supervision) controlling or settlement with a close relative of such civil servantin a public service relationship with the Supervision.

(2) Civil servants of the Supervision may not enter membership, employment orother legal relationship that entails working, executive employment or supervi-sory board membership—except for Article 110 section (2) sub-section c) of theHpt.—with the National Deposit Insurance Fund and the Investor ProtectionFund. This prohibition shall not be infringed if the civil servant is a member of avoluntary mutual insurance fund and private pension fund or insurance society.The civil servant of the Supervision may be assigned as a member of the super-visory board of non-profit companies specified in Hpt.

(3) A civil servant of the Supervision shall not acquire the following (with theexception of inheritance)

130 Appendix 2

a) ownership in a financial organisation;

b) securities except for domestic and foreign government securities, depositbonds, investment units, mortgage bonds and securities issued in restrictedoffering,

c) other investment instruments not listed in sub-section (b) (Article 82 of theTpt.)

(4) A civil servant of the Supervision shall not hold a share of ownership in afinancial organisation, upon his or her appointment he or she shall make a state-ment to the person exercising the right of employer concerning his or her shareof ownership in a financial organisation and on any other investment asset he orshe holds which must not be acquired following his or her appointment.

(5) A civil servant of the Supervision shall be obliged to alienate within 3 monthsof his or her appointment or acquisition all of his or her shares of ownership,securities and any other investment asset, acquired before his or her appointmentor acquired through inheritance, as defined in paragraph (3).

(6) A civil servant of the Supervision shall report to the person exercising theright of the employer immediately the acquisition by his or her close relation liv-ing in the same household with such civil servant, of any share of ownership,securities or other investment assets as defined in paragraph (3).

(7) Until the performance of his or her obligation as per paragraph (5) and in thecase specified in paragraph (6) a civil servant of the Supervision shall not partic-ipate in the preparation and making of a decision pertaining to the organisationconcerned.

(8) Upon his or her appointment a civil servant of the Supervision shall make astatement on his or her membership in a co-operative credit institution. A civilservant of the Supervision shall not need to terminate his or her membershipexisting at the time of his or her employment until he or she owes a debt to thecredit institution concerned. During this period, however he or she shall not par-ticipate in the preparation and making of a decision pertaining to the organisationof which he or she is a member.

(9) Upon his or her appointment a civil servant of the Supervision shall make awritten statement on his or her membership in an insurance association or privatepension fund. A civil servant of the Supervision shall not participate in the prepa-ration and making of a decision pertaining to the organisation of which he or sheis a member.

(10) Upon his or her appointment a civil servant of the Supervision shall make awritten statement on his or her close relation living in the same household withhim or her having a legal relationship with a financial organisation as a seniorexecutive or employment, or other legal relationship relating to the performance

Appendix 2 131

of work, and any such legal relationship that is established after the appointmentof the given civil servant shall be promptly reported to the person exercising therights of the employer. A civil servant of the Supervision shall not participate inthe preparation and making of a decision pertaining to an organisation in whichhis or her close relation living in the same household with him or her has a legalrelationship as listed above.

(11) The civil servant of the Supervision may acquire investment units, securitiesissued in restricted offering and mortgage bonds in a manner regulated by the per-son who exercises employer’s rights over him.

(12) In respect of the application of this Article close relations shall be the per-sons defined as such in Article 685 b) of the Civil Code along with the life com-panion of a civil servant of the Supervision.

(13) Other rules on conflict of interest may be introduced by separate statutes oflaw.

(14) The President and Deputy Presidents of the Supervision may not fill officein political parties, may not conduct activities that entail playing a public role onbehalf or in the interest of a party, and may not be members of Parliament ormunicipality assemblies, municipality or government executives.

(15) The persons mentioned in section (14) may not be executives of or membersof the supervisory board of business companies.

Article 10/A(1) The Supervision operates a public information system in order to make theinformation to be supplied by the organisations and persons specified in Article3 of this Act to the public and the Supervision accessible for the public.

(2) The public information system shall be an electronic system and a daily news-paper published in printed form.

Obligation of secrecy

Article 11(1) Persons employed or having other legal relationship entailing work or havingan assignment from the Supervision shall preserve banking secrets, securitiessecrets, cashier secrets, insurance secrets and business secrets obtained in thecourse of performing their tasks as secrets. This obligation shall survive also afterthe termination of employment or assignment.

(2) Persons listed in section (1) shall treat as professional secrets all data, facts orcircumstances obtained in connection with performing supervisory activities thatthe Supervision is not obliged to make accessible for other authorities or the pub-lic, may not disclose without authorisation and may not use in accordance withlegal requirements.

132 Appendix 2

Chapter IV

Business Management of the Supervision

Article 11/A(1) The following items, specified in separate laws, shall constitute the Supervi-sion’s revenues:

a) fee for administrative services

b) supervision fee

c) supervisory fine

d) other revenue.

(2) The organisations and persons which/who are subject to the scope of the lawsspecified in Article 3 section (1) shall pay fees for administrative services andsupervision fees at a specified rate as well as fines in cases defined by law. Basedon authorisations granted in separate laws the Minister of Finance will determinethe rates of fees for administrative services in a decree. The Minister of Financeshall take into account the opinion of the Supervision’s President concerning theissue of increasing or decreasing fees. The fees shall ensure that the Supervision’soperation is continuous and undisturbed.”e;

Article 11/B(1) The Supervision will manage its revenue from fees on its own, and the pro-portion of fines that may be used up will be governed by the provisions of sepa-rate laws.

(2) The Supervision will use its revenue—except for revenue out of fines—tocover its operation and such revenue may not be removed for other purposes.

(3) Regarding the budget of the Supervision the President of the Supervision hasthe powers as the Head of the organization for this Chapter of State Budget underArticle 49 of the Act No. XXXVIII of 1992 on State Budget.

Interim and closing provisions

Article 12(1) This Act shall enter into force on 1 April 2000.

(2) The Hungarian Banking and Capital Markets Supervision, the State InsuranceSupervision and the State Supervision of Private Pension Funds shall be dis-solved as of 1 April—from that day the Hungarian Financial Supervisory Author-ity shall be the legal successor of those organisations.

(3) Where the law mentions the Hungarian Banking and Capital Markets Super-vision, the State Insurance Supervision and the State Supervision of Funds or

Appendix 2 133

Supervision of Funds they shall be construed as the Hungarian Financial Super-visory Authority as defined herein.

(4) Issues in progress at the time of the entry into force hereof at the HungarianBanking and Capital Markets Supervision, the State Insurance Supervision andthe State Supervision of Funds shall be continued by the Supervision. In thecourse of such proceedings the procedural rules pertaining to the supervisoryauthority with competency at the time of the launching of such issues, shall apply.

(5) It shall not constitute breach of the obligation of keeping business secrecy ifthe State Insurance Supervision, the State Supervision of Funds or the Hungar-ian Banking and Capital Markets Supervision provide business secrets to oneanother in the period of the preparation of the establishment of the HungarianFinancial Supervisory Authority.

(6) A civil servant of the Supervision who was in a civil servant legal relation withthe State Insurance Supervision or the State Supervision of Funds shall beobliged to promptly report on his or her share of ownership, securities or otherinvestments as per Article 10 (3) to the person exercising the right of the employerand shall be obliged to alienate such within 6 months of the entry into forcehereof. Until the alienation of any share of ownership or investment contrary toArticle 10 (3) such civil servant shall not participate in the preparation or makingof a decision that pertains to an institution in which such share of ownership orinvestment exists.

Statutes of law amended

Article 13(1) In Article 8 of Act No. XCVI of 1993 on voluntary mutual insurance funds,the text ‘the Minister of Finance by way of the Supervision of Funds’ shall bereplaced by the text ‘Hungarian Financial Supervisory Authority’.

(2) In Article 101 of Act No. LXXXII of 1997 on private pension and private pen-sion funds, the text ‘... supervision shall be performed by the Minister ofFinance—through the Supervision of Funds -’ shall be replaced by the text ‘...supervision shall be performed by the Hungarian Financial SupervisoryAuthority’.

(3) Article 103 of the Bit shall be replaced by the following provision:

‘Article 103 The scope of competency and legal status of the Supervision shall bespecified by a separate act.’

(4) Article 102 of Act No. LXXII of 1997 on voluntary mutual insurance fundsshall be replaced with the following provision:

‘Article 103 The scope of competency and legal status of the Supervision shall bespecified by a separate act.’

134 Appendix 2

(5) Article 121 (1) a) of the Bit shall be replaced with the following provision:

[(1) The obligation of secrecy as per Article 120 shall not extend to the following]

‘a) data provision to the National Bank of Hungary on its written request’.

(6) The list in Article 44 (2) of Act XXIII of 1992 on the legal status of civilservants shall be supplemented with the Hungarian Financial SupervisoryAuthority.

Statutes of law abrogated

Article 14Upon the entry into fore hereof the following shall be abrogated:

a) Act No. CXIV of 1996 on the State Banking and Capital MarketsSupervision;

b) Article 41 of Act No. XXXIX of 1998 on venture capital investments,venture capital companies and venture capital funds;

c) Article 104, Article 105 (1)-(2), Article 119, Article 122 (1) and (3) of theBit;

d) In Article 104(1)-(3) and (5)-(7), Article 195, Article 121(2)d) of Act No.LXXXII of 1997 on private pension and private pension funds the text ‘StateBanking and Capital Markets Supervision’;

e) the second and third sentences of Article 3(5) and Article 196 of the Hpt;

f) Article 66 of Act LXVIII of 1997 on the amendment of the Hpt.

135

A P P E N D I X 3

The Latvian Law on the Financial and Capital Market Commission 2001*

Passed on June 1, 2000

In effect as of July 1, 2001Note.

This Law will be effective as of July 1, 2001, except for Article 13, on the appoint-ment of Chairperson and his/her Deputy, and Items 1, 2, and 4 of the TransitionalProvisions that are effective as of the day following its promulgation.

With amendments passed by the Saeima (Parliament) on 8 November 2001, whichtook effect on 1 January 2002 (*).

Section I

General Provisions

Article 1This Law shall specify the provisions for the establishment and operation of theFinancial and Capital Market Commission (hereinafter, the Commission).

Article 2(1) The Commission shall enjoy full rights of an independent/autonomous publicinstitution and, in compliance with its goals and objectives, shall regulate andmonitor the functioning of the financial and capital market and its participants.

(2) The Commission shall make independent decisions within the limits of itsauthority, execute functions assigned to it by law, and be responsible for their exe-cution. No one shall be entitled to interfere with the activities of the Commission,except institutions and officials authorised by law.

Article 3(1) The Commission’s legal ability and capacity shall comply with the objectivesset forth in this and other laws. The Commission shall be assigned propertyowned by the state and have an independent balance sheet.

* Unofficial translation, available at <http://www.fktk.lv/law/general/laws/article.php?id=20892>.

136 Appendix 3

(2) The Commission shall have a seal bearing its full name, other corporate req-uisites and an account with the Bank of Latvia.

Article 4Participants in the financial and capital market shall be issuers, investors, creditinstitutions, insurers, private pension funds, insurance brokers, stock exchanges,depositories, broker companies, brokers, investment companies, credit unionsand investment consultants (*).

Section II

Commission’s Goals, Functions, Authorities andResponsibilities

Article 5The goal of the Commission’s activities shall be to protect the interests ofinvestors, depositors and the insured, and to promote the development and stabil-ity of the financial and capital market.

Article 6The Commission shall have the following functions:

1) to issue binding rules and regulations and directives setting out require-ments for the functioning of financial and capital market participants andcalculation and reporting of their performance indicators;

2) by controlling compliance with regulatory requirements and directivesissued by the Commission, to regulate activities of financial and capital mar-ket participants;

3) to specify the qualification and conformity requirement for financial andcapital market participants and their officials;

4) to establish the procedure for licensing and registration of financial andcapital market participants;

5) to collect and analyse information (data) relating to the financial and cap-ital market and to publish it;

6) to ensure accumulation of funds with the Deposit Guarantee Fund, andProtection Fund for the Insured, their management and payment of compen-sation from these funds in accordance with the Laws on Deposits of Individ-uals and the Insurance Companies and their Supervision;

7) (*) to ensure payment of compensations to investors in accordance withthe Investor Protection Law;

Appendix 3 137

8) to analyse regulatory requirements pertaining to financial and capital mar-ket and draft proposals for their improvement and harmonisation with theregulatory requirements Community;

9) to engage in systemic studies, analysis and forecasting of the financial andcapital market development;

10) to cooperate with foreign financial and capital market supervisionauthorities and participate in international organizations of the financial andcapital market supervision institutions.

Article 7(1) Executing the functions specified under Article 6 hereof, the Commissionshall have authority:

1) to issue regulations and directives, governing activities of financial andcapital market participants;

2) to request and receive information necessary for the execution of its func-tions from financial and capital market participants;

3) to, in cases stipulated under the regulations, set forth restrictions on theactivities of financial and capital market participants;

4) to examine compliance of the activities of financial and capital marketparticipants with the legislation, and regulations and directives of theCommission;

5) to apply sanctions set forth by the regulatory requirement to financial andcapital market participants and their officials in case said requirements areviolated;

6) to participate in the general meeting of financial and capital market par-ticipants to initiate convening of meetings of financial and capital marketparticipants’ management bodies, specify items for their agenda, and partic-ipate therein;

7) to request and receive, from the Commercial Register and other public insti-tutions, any information required for execution of its functions free of charge;

8) to cooperate with foreign financial and capital market supervision author-ities and, upon mutual consent, exchange information necessary to executeits functions set forth by law;

(2) In order to execute its functions specified by law, the Commission is entitledto carry out other activities permitted under the normative acts.

Article 8Regulations and directives issued by the Commission are binding upon financialand capital market participants. Regulations are effective as of the day following

138 Appendix 3

their publication in the government journal Latvijas Vestnesis, if same regula-tions do not provide for otherwise.

Article 9

The Commission shall be responsible for:

1) stability and development of the financial market;

2) promotion of free competition within the financial market.

Section III

Relation of the Commission with the Bank of Latvia andthe Ministry of Finance

Article 10(1) At least once per quarter the Commission shall submit information summaryon the situation in the financial and capital market to the Bank of Latvia and theMinistry of Finance.

(2) Of short-term liquidity problems of a particular financial and capital marketparticipant or its potential or actual insolvency, the Commission shall inform theGovernor of the Bank of Latvia and the Minister of Finance in writing. The Com-mission shall be authorised to request the Bank of Latvia to extend a loan againstcollateral to any such credit institution.

(3) The Commission and Bank of Latvia shall share the statistic relevant to exe-cution of their tasks.

Article 11The Commission shall provide information on the financial status of specificcredit-institutions upon a written request of the Governor of the Bank of Latvia.

Article 12If not otherwise specified by regulatory requirements, the information referred toin this Section shall be considered restricted.

Section IV

Establishment and Management of the Commission

Article 13(1) The Commission shall be governed by its Council.

(2) The Council shall be comprised of five members: the Chairperson of theCommission (hereinafter, Chairperson), his/her Deputy and three members, whoare also directors of the Commission’s Departments.

Appendix 3 139

(3) The Parliament shall appoint the Chairperson and his/her Deputy for a periodof six years upon a joint proposal of the Minister of Finance and the Governor ofthe Bank of Latvia.

(4) The Chairperson shall appoint and remove other members of the Councilcoordinating his/her decision with the Governor of the Bank of Latvia and theMinister of Finance.

(5) A person may be appointed to the position of Chairperson, Deputy Chairper-son or a Council member provided that he/she:

1) is competent in financial management;

2) is of good repute;

3) has at least five years experience in the financial and capital market.

(6) The position of Chairperson, Deputy Chairperson or Council member shallnot be taken by a person who:

1) has a criminal record for committing a deliberate offence, irrespective ofits annulment or removal;

2) has been deprived of the right to engage in a particular or any type of entre-preneurial activity.

Article 14The Parliament shall dismiss the Chairperson or Deputy Chairperson fromhis/her position before the end of their terms as specified under Paragraph 2 ofArticle 13 only if:

1) an application on resignation is submitted by the respective person;

2) a court judgement whereby the Chairperson or his/her Deputy is convictedof criminal offence becomes effective;

3) the Chairperson or Deputy Chairperson is not able to officiate for a periodof six consecutive months due to illness or for any other reason;

4) an application submitted jointly by the Governor of the Bank of Latvia andthe Minister of Finance, on his/her early dismissal has been received.

Article 15(1) The meeting of the Council shall be convened and presided over by the Chair-person or, during his/her absence, by the Deputy Chairperson.

(2) The Council shall be considered competent if no fewer than four of its mem-bers are present at a meeting, provided that one of them is the Chairperson orDeputy Chairperson.

(3) Each member of the Council shall have the right to call a meeting of the Coun-cil by submitting a written application.

140 Appendix 3

(4) Meeting of the Council shall be convened on an as-needed basis, however, notless frequently than once a month.

Article 16(1) The Council shall pass resolutions by a simple majority. In case of vote par-ity, the vote of the chairperson of the meeting shall be decisive.

(2) The Governor or Deputy Governor of the Bank of Latvia and the Minister ofFinance may participate in Council meetings in the capacity of advisors. Headsof the public organizations (professional associations) of financial and capitalmarket participants may also take part in Council meetings in such capacity, pro-vided that these meetings have not been declared closed by a resolution of theCouncil.

(3) All Council members attending a Council meeting shall sign its minutes.

(4) If any Council member does not agree with a resolution of the Council andvotes against it, his/her individual opinion shall be recorded in the minutes andhe/she shall not be held responsible for this resolution of the Council.

Article 17The Council shall have the exclusive right:

1) to approve supervisory and regulatory policies for the financial and capi-tal market;

2) to issue binding regulations and directives regulating activities of finan-cial and capital market participants;

3) to issue special permits (licenses) or certificates authorising operation inthe financial and capital market;

4) to suspend and renew the validity of the special permits (licenses) or cer-tificates issued;

5) to annul any special permit (license) or certificate issued;

6) to take decisions on the applications of sanctions against persons in breachof any of the regulatory requirements pertaining to the financial and capitalmarket;

7) to specify payments to be made by financial and capital market partici-pants to finance the activities of the Commission;

8) to approve the structure of the Commission, its Statutes and structuralunits;

9) to approve the annual budget of the Commission;

10) to establish remuneration for the Commission’s staff;

11) to approve the Commission’s performance and annual report;

Appendix 3 141

12) to approve the procedure for registration, processing, storage, distribu-tion and liquidation of information at the disposal of the Commission;

13) to pass resolutions on signing cooperation agreements with the Bank ofLatvia and foreign financial supervision authorities on the exchange of infor-mation necessary for supervision and regulation of the financial and capitalmarket;

Article 18(1) The Chairperson shall represent the Commission and shall be responsible forthe organization of its activity. In the Chairperson’s absence, his/her duties shallbe performed by the Deputy Chairperson.

(2) The Chairperson shall hire and dismiss the Commission’s staff.

(3) The Chairperson shall represent the Commission in its relations withstate institutions, financial and capital market participants and internationalorganizations.

Section V

Responsibility of the Officials and Staff of the Commission

Article 19(1) The members of the Council, heads of its structural units, and other employ-ees are officials of the Commission. The list of the employees to be ranked asgovernment officials shall be approved by the Chairperson;

(2) To determine the restrictions on entrepreneurial activities, gaining income,combining positions and execution of tasks, as well as other related restrictions,duties and responsibilities of the officials of the Commission, the provisions ofthe Anti-corruption law apply.

Article 20(1) The Council members as well as heads and employees of the structural unitsof the Commission are prohibited from publicly disclosing or disseminating inany other manner, both during the their office term, and after termination of theiremployment or any other contract relationship with the Commission, data or anyother information related to financial and capital market participants that has notbeen previously published in accordance with procedures set by law or whose dis-closure has not been approved by the Council.

(2) The persons specified under Clause (1) of this Article, in compliance with theregulatory requirements, shall be held responsible for any illegal disclosure ofrestricted information as well as for any loss incurred by third parties as a resultof unlawful actions of the Commission’s employees.

142 Appendix 3

Section VI

Consultative Council of the Financial and Capital MarketCommission

Article 21(1) Consultative Council of the Financial and Capital Market Commission (here-inafter, the Consultative Council) shall be established to promote the efficiencyof the monitoring of the financial and capital market and promotion of its safety,stability and growth. It shall be a collegial, advisory body charged with the fol-lowing tasks:

1) to review legislation drafted for the regulation of activities of financial andcapital market participants;

2) upon a financial and capital market participant’s request and prior to con-sideration by the Commission, to review the participant’s complaints regard-ing the findings of the Commission’s inspections;

3) to prepare policy recommendations for the Council relevant to the execu-tion of the Commission’s functions as set by law, and improvement anddevelopment of the financial and capital market regulation and monitoring;

4) to review the Commission’s annual budget and issue its opinion thereupon;

5) to submit proposals to the Chairperson of the Commission regardingimprovement of the Commission’s activities;

6) to supervise the accrual of funds with the Deposits Guarantee Fund andthe Fund for the Protection of the Insured and compensation payments fromthese Funds.

(2) If the Council’s decision does not agree with the opinion previously made bythe Consultative Council on the same issue, the minutes of the Council meetingshall reflect the motivation for declining said opinion.

(3) The Consultative Council shall be comprised of representatives of the Com-mission and heads of the public organizations (professional associations) offinancial and capital market participants on the principle of parity.

(4) The Consultative Council shall be considered competent if at least half of itsmembers are present at its meeting. It shall pass resolutions by a simple majorityof vote of the members present. In case of vote parity, the resolution shall be con-sidered not passed.

(5) The meeting of the Consultative Council shall be presided by the Chairpersonor Deputy Chairperson of the Commission.

(6) The Commission shall be responsible for the record keeping of the Consulta-tive Council.

Appendix 3 143

Section VII

Financing of the Commission

Article 22(1) Activities of the Commission shall be financed from payments of the partici-pants of the financial and capital market made in the amounts specified by theCouncil and not exceeding the amount set by law. The participants’ paymentsshall be transferred to the Commission’s account with the Bank of Latvia and uti-lized solely for the purpose of financing its activities.

(2) Payments by permanent representative offices and branches of foreign under-takings (business enterprises) engaging in entrepreneurial activity in the Repub-lic of Latvia as participants of the financial and capital market shall be made asprovided for under Article 23 of this Law.

Article 23(1) The Commission’s revenue shall be comprised of:

1) insurers’ payments calculated from the total sum of the received quarterlyinsurance premiums:

a) up to 0.4% (inclusive) of life insurance transactions related to theaccrual of funds;

b) up to 0.2% (inclusive) of transactions related to the third partymandatory civil liability insurance of land vehicle owners;

c) up to 0.7% (inclusive) of other insurance;

2) private pensions fund payments of up to 0.4% (inclusive) of quarterly con-tributions made by or on behalf the pension plan members within pensionplans licensed by private pension funds;

3) credit institutions’ payments of up to 0.033% (inclusive) of the averagequarterly value of their assets;

4) brokerage companies’ payments of up to 1% (inclusive) of the averagequarterly gross income from their transactions, but not less than 2,000 latsper year;

5) Stock Exchange payments of up to 2% (inclusive) of the average quarterlygross income from the Stock Exchange transactions, but not less than 5,000lats per year;

6) Depository payments of up to 2% (inclusive) of the average quarterly grossincome from the Depositor’s transactions, but not less than 5,000 lats per year;

7) investment companies’ payments of up to 0.033% (inclusive) of the quar-terly average asset value of investment funds managed by the investmentcompanies, but not less than 2,500 lats per year;

144 Appendix 3

8) income from services provided by the Commission as set by law;

9) (*) payments of credit unions for financing the activities of the Commis-sion of up to 0.033% of the average quarterly value of their assets.

(2) Payments for financing the Commission are made by each participant in thefinancial and capital market in compliance with Paragraph 1 of this Article andParagraph 2 of Article 22.

Article 24(1) In accordance with the provision and terms set forth by the Commission,financial and capital market participants shall file with the Commission reportsas necessary for the calculation of payments determined by Article 23 and makepayments for financing the Commission by 30th day of the first month followingthe end of each quarter.

(2) The Commission shall issue binding regulations on the filing of the reportsspecified under Paragraph 1 of this Article and on calculation of payments.

(3) The Payments made by financial and capital market participants for financ-ing the Commission shall be accounted for as their expenditure.

Article 25(1) A delayed or incomplete transfer of payment to the Commission’s accountwith the Bank of Latvia shall incur a penalty in the amount of 0.05% of the out-standing amount per each of delay.

(2) Financial and capital market participants shall transfer the penalty calcu-lated for the delay in payment to the Commission’s account with the Bank ofLatvia.

Article 26The end of the year balance of the Commission’s accounts with the Bankof Latvia shall remain at the disposal of the Commission and shall be utilizedin the succeeding year for financing the budget expenditure approved by theCouncil.

Section VIII

Control over the Commission’s Activity

Article 27The Commission shall annually—but no later than 1 July—file with the Parlia-ment and the Ministry of Finance a written report on its performance during theproceeding year and full annual accounts audited by a sworn auditor (*).

Appendix 3 145

Article 28The Commission shall publish its balance sheet statement and the opinion of thesworn auditor in the government journal Latvijas Vestnesis not later than on July1 following the end of the reporting year.

Transitional Provisions 1. The Credit Institutions Supervision Department of the Bank of Latvia, theSecurities Market Commission and the Insurance Supervision Inspectorate shallmerge by June 30, 2001.

2. The Commission shall commence its activities on July 1, 2001.

3. The Commission shall be the legal successor of the rights, obligations and lia-bilities of the Securities Market Commission and the Insurance SupervisionInspectorate, rights pertaining to the management of the Deposits GuaranteeFund, and Bank of Latvia’s rights, obligations and liabilities credit institution’ssupervision.

4. By August 31, 2000 the Chairperson shall set the Commission’s draft budgetfor 2001. The expenses related to the establishment pertaining to the supervi-sion of its activities shall be proportionally covered from the funds of theBank of Latvia, Securities Market Commission and Insurance SupervisionInspectorate.

5. Within the period from July 1, 2001 to December 31, 2006, activities ofthe Commission shall be financed from payments made by the participants inthe financial and capital market, the state budget and the Bank of Latvia asfollows:

1) expenses related to the supervision of credit institutions:

a) in the years 2001, 2002 and 2003, 1,200,000 lats shall be providedby the Bank of Latvia;

b) in the year 2004, 960,000 lats shall be provided by the Bank ofLatvia and the rest by credit institutions in compliance with the provi-sions set out in Section VII hereof;

c) in the year 2005, 600,000 lats shall be provided by the Bank ofLatvia and the rest by credit institutions in compliance with the provi-sions set out in Section VII hereof;

d) in the year 2006, 240,000 lats shall be provided by the Bank ofLatvia and the rest by credit institutions in compliance with the provi-sions set out in Section VII hereof;

2) expenses related to the supervision of insurance shall be covered by theinsurers in compliance with the provisions set out in Section VII hereof;

146 Appendix 3

3) (*) expenses related to the supervision of the securities market and privatepension funds:

a) in the year 2001, 100% of the total shall be covered from the statebudget;

b) in the year 2002, 198,962 lats shall be provided by the state budgetand 50,000 lats by financial and capital market participants, exceptcredit institutions and insurers, in compliance with the provisions setout in Section VII hereof;

c) in the year 2003, 150,000 lats shall be provided by the state budgetand 100,000 lats by financial and capital market participants, exceptcredit institutions and insurers, in compliance with the provisions setout in Section VII hereof;

d) in the year 2004, 100,000 lats shall be provided by the state budgetand 150,000 lats by financial and capital market participants, exceptcredit institutions and insurers, in compliance with the provisions setout in Section VII hereof;

e) in the year 2005, 50,000 lats shall be provided by the state budgetand 200,000 lats by financial and capital market participants, exceptcredit institutions and insurers, in compliance with the provisions setout in Section VII hereof;

f) in the year 2006, 250,000 lats shall be provided by financial and cap-ital market participants in compliance with the provisions under Sec-tion VII hereof;

(4) (*) expenses related to the supervision of credit unions shall be covered bycredit unions in compliance with the provisions set out in Section VII hereof.

6. The payment defined under Paragraph 1 of Article 5 of the Transitional Provi-sions shall be executed by the Bank of Latvia once per quarter by the 15th day ofthe first month of each quarter in an amount equal to one fourth of the amountthat the Bank of Latvia is due to cover in the respective year.

7. Commencing with the year 2007, the activities of the Commission shall befully financed from the payments of financial and capital market participants.

8. Licenses (permits) and professional qualification certificates issued by theSecurities Market Commission, the Insurance Supervision Inspectorate and theBank of Latvia for operation in the financial and capital market still valid on July1, 2001 shall be valid until their expiration. Provisions for intensified supervisionand restrictions on financial services applied by the Bank of Latvia in accordancewith the Law on Credit Institutions that are effective on July 1, 2001 shall remainvalid until the Commission resolves to abolish them.

Appendix 3 147

9. Until the passage of the respective regulatory requirements of the Commission,yet not later than by January 1, 2002, the following Cabinet of Ministers Regula-tions shall remain effective, unless this law stipulates otherwise:

1) the Cabinet of Ministers Regulation No. 401 of October 6, 1998 for Pay-ments to the Protection Fund of the Insured;

2) the Cabinet of Ministers Regulation No. 421 of October 27, 1998 for theAnnual Reports of Insurance Companies;

3) the Cabinet of Ministers Regulation No. 436 of November 17, 1998 for theRegistration Rules for Insurance Companies and Insurers;

4) the Cabinet of Ministers Regulation No. 441 of November 24, 1998 forAccounting for Insurance Broker’s Services in Insurance BrokerageCompanies;

5) the Cabinet of Ministers Regulation No. 442 of November 24, 1998 forInsurance Brokerage Companies Civil Liability Insurance;

6) the Cabinet of Ministers Regulation No. 18 of January 19, 1999 for theCertification of Insurance Brokers;

7) the Cabinet of Ministers Regulation No. 91 of March 17, 1998 for SpecialPermits (Licenses) for the Operation of Private Pension Fund;

8) the Cabinet of Ministers Regulation No. 234 of July 7, 1998 for theCalculation of Additional Capital Accrued with Private Pension Fund;

9) the Cabinet of Ministers Regulation No. 253 of July 14, 1998 for thePrivate Pension Fund’s Annual Report.

10. until the adoption of the respective regulatory documents by the Commission,but no later than January 1. 2002, binding regulations, issued by the SecuritiesMarket Commission, Insurance Supervision Inspectorate and the Bank of Latvia,governing the operation of financial and capital market participants, calculationof their performance indicators and reporting shall remain effective unless thislaw stipulates otherwise.

11. As of July 1, 2001, the Law on the Securities Market Commission shall be nolonger in effect (Zinotajs of the Parliament of the Republic of Latvia and the Cab-inet of Ministers, 1995, No. 20; 1997, No. 14; 1998, No. 23).




by Kishor Uprety










Publishers, Moscow








149

Select Bibliography

Abrams, R. K. & M. Taylor, Issues in the Unification of Financial Sector Supervision,IMF Operational Paper MAE/00/03 (IMF 2000).

Alesina, A. & R. Gatti, Independent Central Banks: Low Inflation at No Costs,85 Amer. Econ. Rev., Papers and Proceedings.

Alexander, W., J. Davis, L. Ebrill & C. J. Lindgren, (eds.) Systemic BankRestructuring and Macroeconomic Policy (IMF 1997).

Arora, A., Practical Banking and Building Society Law (Blackstone Press 1997).

Bean, C., The New UK Monetary Arrangement: A view from the literature, 108Econ. J. 1795–1809 (1998).

Bjerre-Nielsen, H., Objectives, functions and structure of an integrated supervisoryauthority, paper presented at a conference on the challenges of unified financialsupervision in the new millennium (Tallinn, July 2001).

Blair, M., R. Cranston, C. Ryan & M. Taylor, Blackstone’s Guide to The Bank ofEngland Act 1998 (Blackstone Press Ltd. 1998).

Blake, A. P. & M. Weale, Costs of Separating Budgetary Policy from Control ofInflation: A Neglected Aspect of Central Bank Independence, 50 OxfordEconomic Papers (1998).

Briault, C. B., Building a single financial services regulator, paper presented at aconference on the challenges of unified financial supervision in the newmillennium (Tallinn, July 2001).

______, The Rationale for a Single National Financial Services Regulator,Occasional Paper Series No. 2 (Financial Services Authority 1999).

______, A Single Regulator for the UK Financial Services Industry, FinancialStability Review (November 1998).

Briault, C. B., A. G. Haldane & M. A. King, Independence and Accountability,Bank of England Working Paper No. 49 (Bank of England 1996).

Caprio Jr., G. & P. Honohan, Beyond Capital Ideals: Restoring Banking Stability,Policy Working Paper 2235 (The World Bank 1999).

Central Banking Publications, How Countries Supervise their Bank, Insurers andSecurities Markets (Central Banking Publications 1999).

150 Select Bibliography

Challenges for the Unified Financial Supervision in the New Millennium (TheWorld Bank and Ministry of Finance of Estonia 2001).

Cranston, R., Principles of Banking Law (Clarendon Press 1997).

Da Costa, M., Book Review of R. de Krivoy, Collapse: The Venezuelan BankingCrisis of ’94, 38(1) Fin. & Dev. J. (2001).

Daemestri, E. & F. Guerrero, The Rationale for Integrated Financial ServicesSupervision in Latin America and the Caribbean, Technical Paper SeriesIFM-135 (Inter-American Bank 2003).

Daniel, H. & C. Pzarbasioglu, Leading Indicators of Banking Crises—Was Asia Different?, Working Paper WP/98/91-EA (IMF 1998).

de Luna Martinez, J., & T. A. Rose, International Survey of Integrated Financial Sector Supervision, Financial Sector Operations Policy Department: Policy Research Working Paper No. 3096 (The World Bank 2003).

Debelle, G., Central Bank Independence: A Free Lunch?, IMF Working Paper,No. 96/1 (IMF 1996).

Diamond, D. & P. Dybvig, Bank Runs, Deposit Insurance, and Liquidity, 91(3)J. Polit. Econ. (1983).

Drees, B. & C. Pazarbasioglu, The Nordic Banking Crisis: Pitfalls in FinancialLiberalization?, Occasional Paper 161 (IMF 1998).

Dziobek, C. & C. Pazarbasioglu, Lessons from Systemic Bank Restructuring(IMF 1998).

Ferran, E., Examining the UK’s Experience in Adopting a Single FinancialRegulator Model, 28 Brook. J. Intl. L. 257 (2003).

Folkerts-Landau, D. & C. Lindgren, Toward a Framework for Financial Stability(IMF 1998).

Fuhrer, J. C., (ed.) Goals, Guidelines, and Constraints Facing Monetary PolicyMakers, Federal Reserve Bank of Boston Conference Series No. 38 (FederalReserve Bank of Boston 1994).

Goodhart, C. A. E., P. Hartman, D. T. Llewellyn, L. Rojas-Suarez & S. Weisbrod,Financial Regulation (Routledge 1998).

Halvorsen, M. G., Process of Merging Different Supervisory Agencies, paperpresented at a conference on the challenges of unified financial supervision inthe new millennium (Tallinn, July 2001).

International Compliance Association, International Diploma in Anti-MoneyLaundering—Manual (International Compliance Association 2003).

, International Diploma in Compliance—Manual, (InternationalCompliance Association 2003).

Select Bibliography 151

Kawai, Y., Global Cooperation of Supervision in the Three Financial Sectors, paperpresented at a conference on the challenges of unified financial supervision inthe new millennium (Tallinn, July 2001).

Kraft, V. Safeguarding Financial Stability–Key Issues for the Central Bank, paperpresented at a conference on the challenges of unified financial supervision inthe new millennium (Tallinn, July 2001).

Lindgren, C., Authorities’ Roles and Organizational Issues in Systemic BankRestructuring, Working Paper WP/97/92-EA (IMF 1997).

Llewellyn, D. T., The Creation of a Single Financial Regulatory Agency In Estonia:The Global Context, paper presented at a conference on the challenges ofunified financial supervision in the new millennium (Tallinn, July 2001).

, paper presented at the conference on Regulation and Stability in theBanking Sector, Some Lessons for Bank Regulation from Recent Cases(De Nederlandsche Bank, Amsterdam, November 3–5, 1999).

Mehrez, G. & D, Kaufmann, Transparency, Liberalization, and Banking Crises,Policy Research Working Paper 2286 (The World Bank 2000).

Mehta, P. S., Why a Steel Regulator Makes Little Sense, Business Line, December 17,2004.

Mwenda, K. K. & D. A. Ailola, (eds.) Frontiers of Legal Knowledge: Business andEconomic Law in Context (Carolina Academic Press 2003).

Mwenda, K. K. & A. Fleming, International Developments in the OrganizationalStructure of Financial Services Supervision: Part II, 17(1) J. Intl. Banking L.(2002).

______, International Developments in the Organizational Structure of FinancialServices Supervision: Part I, 16(12) J. Intl. Banking L. (2001).

Mwenda, K. K. & J. M. Mvula, A Framework for Unified Financial ServicesSupervision: Lessons from Germany and other European Countries, 5(1) J. Intl.Banking Reg. (2003).

______, Unified Financial Services Supervision in Latvia, the United Kingdom andScandinavian Countries, 10(1) Murdoch U. Electronic J. L. (2003).

Mwenda, K. K., Legal Aspects of Unified Financial Services Supervision inGermany, 4(10) Germ. L. J. (2003).

______, Unified Financial Services Supervision in Zambia: The Legal andInstitutional Frameworks, 36 Zambia Law Journal (2004).

______, Unified Financial Services Regulation: The Unfolding Debate, 1(2)CHIMERA Journal 25–30 (2003).

______, Integrated Financial Services Supervision in Poland, the UK and theNordic countries, 10(2) Tilburg Foreign Law Review (2002).

152 Select Bibliography

______, The Regulatory and Institutional Framework for Unified Financial ServicesSupervision in the Baltic States, 9(2) Journal of East European Law (2002).

______, Zambia’s Stock Exchange and Privatization Programme: CorporateFinance Law in Emerging Markets (The Edwin Mellen Press 2001).

______, Banking Supervision and Systemic Bank Restructuring: An Internationaland Comparative Legal Perspective (Cavendish Publishing 2000).

______, Recent Developments in Banking Supervision and Systemic BankRestructuring: A Legal Perspective, 31 Zambia L. J. (1999).

______, Legal Aspects of Corporate Finance: The Case for an Emerging StockMarket, unpublished Ph.D. thesis (The University of Warwick 1998).

Posen, A., Central Bank Independence and Disinflationary Credibility: A MissingLink, 50 Oxford Economic Papers (1998).

Quintyn, M., & M. W. Taylor, Should Financial Sector Regulators be Independent?,Economic Issues 32, (IMF 2004).

Ramirez, S. A., Depoliticising financial regulation, 41(2) Wm. & Mary L. Rev.(2000).

Saal, M., Bank Soundness and Macro-economic Policy (IMF 1996).

Samiei, H., J. K. Martijn, Z. Kontolemis & L. Bartolini, United Kingdom: SelectedIssues (IMF 1999).

Sheldon, A., (ed.) Financial Regulation or Over-regulation (Institute of EconomicAffairs 1988).

Sheng, A., (ed.) Bank Restructuring: Lessons from the 1980s (The World Bank 1996).

Sundararajan, L., A. Petersen & G. Sensenbrenner, Central Bank Reform in theTransition Economies (IMF 1997).

Svensson, L. E. O., Inflation Targeting: Implementing and Monitoring InflationTargets, 41 Eur. Econ. Rev. 1111-46 (1997).

Taylor, M., Peak Practice: How To Reform the United Kingdom’s Regulatory System(Centre for the Study of Financial Innovation 1996).

______, Twin Peaks: A Regulatory Structure for the New Century (Centre for theStudy of Financial Innovation 1995).

Taylor, M. & A. Fleming, Integrated Financial Supervision: Lessons from NorthernEuropean Experience, Policy Research Working Paper 2223 (The World Bank1999).

Trink, A., a paper presented at a conference on the challenges of unified financialsupervision in the new millennium, Challenges for Estonian Unified FinancialSector Supervision (Tallinn, July 2001).

World Bank, The, Abstracts, Policy Research Working Paper Series, Numbers2262–2299 (The World Bank 2000).

______, Abstracts, Policy Research Working Paper Series, Numbers 2197–2261(The World Bank 1999).

Index

References to figures, tables, and notes are indicated by “f,” “t,” and “n.”

153

accountabilityindependence and, 19, 20, 22,

24–31, 34, 35, 92of regulators, 2, 14, 34, 38, 39–40t,

83, 92of regulatory agencies, 58n186regulatory framework and, 12, 14unified regulator and, 43

Australia, 9, 48, 49, 53Australian Prudential Regulatory

Authority (APRA), 9Australian Securities and Investment

Commission (ASIC), 9Austria, 7, 50authorization to conduct financial

services business, 14–15authorizing financial intermediaries,

28, 69See also financial intermediaries

Baltic States, 57Bank of England, 11, 22–24, 38Bank of England Act (1998), 82–83Bank of Finland, 79, 80Bank of Jamaica (BOJ), 47Bank of Korea, 30Bank of Latvia, 61, 63–70Bank of Zambia. See Central Bank of

Zambia (BOZ)Bank Restructuring Agency

(Indonesia), 31Barings, collapse of, 4

Basel Accord, 28, 83Basel Committee Core Principles for

Effective Banking Supervision, 28, 61, 79

BCCI (Bank of Credit and CommerceInternational), collapse of, 4

Belgium, 50best practices. See standards of best

practiceboom and bust, 22BOZ. See Central Bank of ZambiaBuilding Societies Commission

(UK), 11Bulgaria, 10, 45–46business conduct. See standards of

business conductby-markets regulatory model, 10

See also regulation by silos

Canada, 4, 10, 48, 49, 57, 90–91capital

control systems, 4human, 13–14, 42, 59Latvia model and, 63regulatory framework and, 12, 20

Capital Adequacy Directives (CAD andCAD II; EU), 83

central bankbanking supervision by, 7independence of, 19–20, 22–24,

28–29, 32insurance industry and, 53

154 Index

central bank (Continued )as lender of last resort, 84as unified financial services

regulator, 53Central Bank and Financial Services

Authority of Ireland Bill (2002), 29

Central Bank of Zambia (BOZ), 46–47, 50

Chief Executive Officer (CEO), 27, 92

Chinese walls, 3–4civil code, 5, 28Code of Market Conduct (UK), 86–87codes of conduct, 3, 28commercialization, 32Commodity Futures Trading

Commission (CFTC; US), 6common law, 5, 6, 28company services providers, 4competition, 9, 59, 72, 78compliance

See also International ComplianceAssociation (ICA)

enforcement of, 13, 16Latvia Model and, 65, 66, 71procedures and activities, 14–15supervision of, 7unified regulators and, 91

conduct of business rules, 5, 7, 9, 44

confidentiality, 15, 24, 92conflicts of interest, 15, 82n322, 84constitutions, 4, 5, 90, 91consumer confidence, 3, 4, 89consumer protection, 4contagion, 4, 9, 42, 92corporate governance, 5, 22, 27,

91–92corruption, 29

See also fraudcost

benefit vs., 33of financial crisis, 30

fiscal and social, 32industry, 33reduction of, 43of supervisory failure, 84

cost effectiveness, 72

Denmark, 10, 48, 50Deposit Guarantee Fund (Latvia), 65deposit-taking, 4directors, 27doctrines of equity, 5, 28

economic liberalisation, 3economic theories, 22economy

command economy, 31macroeconomic policies, 41, 42

Ecuador, 53El Salvador, 53emerging economies, 13–14, 33enforcement

See also complianceFSA and, 86functional regulation and, 10importance of, 4institutional independence and, 21powers of regulator, 2of regulations, 16unified regulator and, 41n1

37, 42Enron, 4equity. See doctrines of equityEstonia, 50Estonian Financial Supervisory Act

(2001), 93–122European Union (EU), 7–8, 8t,

42, 61, 83, 85

failing banks, 32Federal Deposit Insurance Corporation

(FDIC), 6Federal Reserve, 6, 20Financial Action Task Force (FATF),

7, 50

Index 155

Financial and Capital MarketCommission of Latvia, 63–74

appointments to five-memberCouncil, 67–68

assets of, 73–74Consultative Council, 70–71financing of, 74functions of, 65–66Law on the Financial and Capital

Market Commission (2001), 63,66, 68, 73, 74, 135–147

management by five-memberCouncil, 67–68

meetings of five-member Council,68–69

powers of five-member Council, 69–70

regulatory framework and, 73relations to other agencies, 66–67strategic goals of, 71–73structure of, 63, 64f

financial crime, 4See also money laundering

financial crisisindependence of regulator and, 2,

19, 26, 29–31, 34, 35reserve funds of regulatory agencies

and, 26risk of contagion and, 42Russian, 59Swedish, 79unified model for financial

supervision and, 84unified regulator and, 42, 43–44

financial intermediariesauthorizing, 28, 69fiduciary duty of, 28licensing, 28, 39, 63regulating, 3, 28, 50, 53, 54regulatory independence and, 20

financial marketsfairness of, 4global, 3independence of regulator and, 33

product innovation in, 92rapid change in, 35structural change in, 44weak, 31–32well-developed, 32

financial scandals, 4financial sector

regulation, 2, 20, 24, 32, 33, 44size, 3, 6, 17

Financial Sector Action Committee(Indonesia), 31

Financial Services Agency (Japan), 31Financial Services and Markets Act

(FSMA; UK), 84–89Financial Services Authority (FSA;

UK), 11, 38, 82–83, 85–86financial services businesses

authorization to conduct, 14–15consumers and, 4, 89evaluating, 14–15independence and, 20minimum standards of business

conduct for, 90objectives for, 3protection against fraudulent

activity in, 3regulation of, 3, 5, 9regulators and, 7supervision of, 9, 15–16unified supervision of, 48, 55

Financial Services Commission(Jamaica), 47

Financial Services Ombudsman (UK),84–85

Financial Supervision Authority (FSA;Finland), 79–81

Financial Supervisory Commission(FSC; Bulgaria), 45–46

Financial Supervisory Commission(FSC; Korea), 40t

financial systems, national, 3Finansinspektionen (Sweden), 77–79Finanstilsynet (Denmark), 78–79Finland, 7, 79–81

156 Index

Finnish Insurance SupervisionAuthority, 80–81

“fourth branch of government,” 34fraud

financial services businesses,protection against, 3

securities, 27Friendly Societies Commission (UK), 11Friendly Societies legislation (UK), 86functional regulation, 8, 9, 10, 37

Germany, 7, 42, 50, 52, 57Guatemala, 53

Hockin-Kwinter Accord (Canada), 91Hong Kong Monetary Authority, 7human capital, 13–14, 42, 59Hungary, 10, 50, 53, 57, 92, 123–134

Iceland, 10, 48, 53, 57IMF. See International Monetary Fundimmunity of regulators from lawsuits,

27, 89–90incentives, 2, 19, 21–22, 35, 42, 84, 90independence, 19–35

absolute, 33accountability and, 19, 20, 22,

24–31, 34, 35, 92arguments for and against, 31–34assessment of efficacy of framework

for, 26–29budgetary, 24–26central banks, 19–20, 22–24, 32incremental, 33institutional, 21–22, 24operational, 14, 21, 23, 23, 24, 74, 76political, 2, 19, 34, 35, 39t, 74promoting independence of

financial services regulator, 19–22

regulator, 14, 19–35regulatory, 20risk and control management, 15supervisory, 21

independent central banks, 19–20, 22–24, 32

Indonesia, 31industry. See financial services

businessesindustry capture, 33inflationary bias, 23inflation targeting, 22–23information

confidentiality, 15, 24, 92effective and efficient coordination,

53–54imbalance, 4, 90memorandum of understanding

on, 92reporting and management

information, 15resources, 89technology, 10, 15

insider dealing, 85institutional regulation, 8, 9–10Insurance Commissioner

(Hong Kong), 7Insurance Directorate of the

Department of Trade and Industry (UK), 11

insurance industrySee also specific agencies and

countriescentral bank and, 53conduct of business

regulation, 44functional matrix and, 37host and foreign regulators, 92independent insurance agency,

53–54interconnectedness and, 58, 89licensing, 28resources and, 13silo model and, 10, 37–38supervision models and, 8, 8tunified financial services

supervision, 48–49, 49t, 54unified regulator and, 11, 38

Index 157

Insurance Supervision Inspectorate(Latvia), 61, 63, 64

interconnectedness, 92internal control systems, 4, 5international community, 4International Compliance Association

(ICA), 3, 5internationalization of businesses in

financial sector, 92International Monetary Fund (IMF)

on Bank of England, 22on business development role of

regulators, 7on central bank independence, 20, 23on failing banks, 32on Financial Services Authority

(FSA; UK), 85–86on Latvian economy, 59, 60, 61

Investment Management RegulatoryAuthority (UK), 11

investor confidence, 89Ireland, 42

Jamaica, 47Japan, 31, 48, 53

Keynesian model, 22–23Korea, 30, 48, 53Kredittilsynet (Norway), 75–77

Latvia, 59–74banking sector in, 60–61Financial and Capital Market

Commission, 63–74See also Financial and CapitalMarket Commission of Latvia

financial sector in, 59–62, 62tinsurance companies in, 61interbank market in, 62model of unified financial

supervision in, 59–63nonresident deposits in banks in, 60stock market in, 61vulnerability of economy in, 60

law and economics, 1law reform, 1, 34, 89lawsuits, immunity of regulator, 27,

89–90legal powers of regulatory body, 12–14legislation

See also specific countriesprimary enabling, 5, 13secondary, 5, 91

lender of last resort (LOLR), 84liability, protection of regulators from,

13, 68licensing financial intermediaries,

28, 39, 63, 69See also financial intermediaries

Lloyd’s of London, 11, 86Luxembourg, 7

Malaysia, 53Malta, 51–52, 53Malta Financial Services

Authority, 51Mandatory Provident Fund Authority

(Hong Kong), 7market conduct regulation, 9Mauritius, 49–50mega-regulator, 43mega-supervisors, 54memorandum of understanding, 11,

15, 66n222, 92minimum standards of business

conduct for financial servicesbusinesses, 90

models of financial service regulation,1, 7–11

monetary policycentral bank and, 9, 22, 23, 24,

32, 84fiscal policy and, 23inflation and, 23politicians and, 26

Monetary Policy Committee (MPC; UK), 23

money laundering, 3, 4, 59, 72

158 Index

moral hazard, 84mutual societies registration, 86

NASDAQ, 87national financial systems, 3Netherlands, 50Netherlands Antilles, 53Nigeria, 50Norges Bank (Norway), 77Norway, 10, 42, 48, 50, 74–77

Office of the Comptroller of theCurrency (US), 6

Office of the Superintendent ofFinancial Institutions (OSFI;Canada), 90

offshore jurisdictions, 6ombudsman, 28, 78, 84–85organizational structure, 2, 38Oslo Stock Exchange (Norway), 75

Pakistan, 53pensions

conduct of business regulation, 44connections within financial sector

and, 58, 89licensing and, 28, 37regulator of, 11silo model and, 10, 37supervision and, 13unified regulator and, 37, 38

Pensions and Insurance Authority (PIA; Zambia), 46, 50

Personal Investment Authority (UK), 11

Peru, 53Philippines, 52Poland, 10, 47, 57policy directives, 5, 91political interference, 29–31primary enabling legislation,

5, 13principles

Basel Accord guidelines, 83

business principles and goodpractices, 78

of corporate governance, 27of parity, 70regulatory framework and, 5, 7, 12unified regulator and, 41n137, 50,

91–92principles-based system of regulation,

11, 12privatization, 32, 60product innovation, 92property rights, 5Protection Fund for the Insured

(Latvia), 65prudential rules, 5

recognized overseas clearing houses(ROCHs), 87

recognized overseas investmentexchanges (ROIEs), 87

Registry of Friendly Societies (UK), 11regulation

of banking and investmentbusinesses, 4

binding rules, 5defined, 5enforcement of, 16functional, 8, 9, 10, 37institutional, 6, 8, 9–10objectives of, 3–4, 6, 15, 41, 43, 87private or public body, 5prudential, 9, 28, 54, 72

regulation by objectives, 8–9, 10, 37regulation by silos, 8, 9–10, 37–38, 45regulators

accountability of, 2, 14, 34, 38, 39–40t, 83, 92

authorization to conduct financialservices business, 14–15

best practices in structuring, 89central banks, relationship with,

28–29function of, 7housing of, 12

Index 159

immunity from lawsuits, 27, 89–90independent, 19–35liability protection, 13, 68role of, 5

regulatory agenciesSee also specific countries and

agenciesaccountability of, 58n186functional vs. silos matrix, 37–38funding of, 26human capital and, 13importance of, 34independence of, 20–21, 39–40tlack of infrastructure and

technology and, 14transparency and confidentiality, 27unified, 41, 43, 45, 47, 48, 49

regulatory and institutional frameworkaccountability, 12, 14assessment of efficacy of, 26–29authorization to conduct financial

services business, 14–15best practices in structuring

regulators, 89comparative perspective, 57–87composition of, 5control of abuses through, 3–4corporate governance principles,

91–92design, 1–17, 8tfunction of regulators, 7general statutory powers of

regulatory body, 12–14housing of regulator, 12immunity of regulators from

lawsuits, 27, 89–90information imbalance and, 4, 90models of, 7–11, 89preliminary issues, 58–59principles-based or rules-based

regulation, 11, 12“regulation” defined, 5supervision of financial services

businesses, 15–16

regulatory authorityduplicative, 6guidance or policy directives of, 5international, 3manner of regulation by, 3market sector, 3national, 3regional, 3

“regulatory capture,” 33regulatory environment, 2regulatory model, 1, 7–11Republic of Korea. See KoreaReserve Bank of Australia, 9resources

back office, 15effective regulatory bodies and, 12financial and human capital, 12,

13–14, 38front office, 15independence and, 21, 28, 33information technology, 10, 15lack of, 13–14, 58–59, 89training, 15unified regulator and, 12, 41, 42, 43

restructuring process, 1, 55, 87risk

control systems, 3, 17systemic, 3, 4, 9, 61, 89, 92

risk assessment, 15rules-based regulatory model, 2, 11,

12, 21

salaries, 136Scandinavian countries, 74–81

See also specific countriessecondary legislation, 5, 91securities

See also specific agenciescentral bank and, 53dedicated agency for, 48de-listing of, 28fraud and misrepresentation and, 27under functional matrix, 37integrated supervision, 54

160 Index

securities (Continued )lack of connections in financial

sector, 58, 89listing, 28regulation of, 4regulators and, 33regulatory structure, 48, 49tsilo model, 10unified regulator and, 11, 38, 41

Securities and Exchange Commission(SEC; US), 6

Securities and Futures Authority (UK), 11

Securities and Futures Commission(Hong Kong), 7

Securities and Investment Board (UK), 11

Securities Market Commission(Latvia), 63, 64

self-regulatory organizations (SROs), 11

silos matrix. See regulation by silosSingapore, 48, 49, 53single global financial marketplace, 3single regulator, 8, 10–11Slovak Republic, 48solvency margin formula, 61South Africa, 48, 50standards of best practice

absence of, 1, 2corporate governance and

accountability, 22international standards and, 4,

28, 42unified financial services

supervision, 1, 52, 55, 57, 87, 89, 92

standards of business conduct, 4, 33, 90

State Regulator (U S), 6statutory powers of regulatory body,

12–14stock exchange, 61, 75supervision

See also unified financial servicessupervision

consolidated, 15, 83designing framework for, 1–17, 8tenforcement of regulations, 16regulatory framework, 1–17risk-based approach to, 15–16unified financial services regulator

and, 38, 41Supervision and Surveillance

Department of the Bank ofEngland, 11

Sweden, 10, 42, 48, 50, 77–80, 81Swiss Bankers Association, 53Swiss Federal Banking

Commission, 52Swiss Federal Private Insurance

Bureau, 52Switzerland, 52–53Sydney Futures Exchange, 87systemic risk, 3, 4, 9, 61, 89, 92

See also contagion

transactions, crossborder andmultisector, 15

transition economies, 42, 60transparency, 3, 14, 89Treasury (UK), 11, 82, 87trust, 71, 72twin peaks model, 9, 53

UK Financial Services and MarketsCompensation Scheme (FSMC),86–87

UK Listing Authority, 11unified financial services regulator,

37–55, 39–40taccountability of, 43advantages and disadvantages

of, 41, 43–44, 54choice of, 10comparative perspective, 57–87contingency approach, 48–49, 49tdeciding whether to unify, 47–48

Index 161

described, 8, 10–11examples of, 45–47fully unified regulator, 37, 38information coordination among

major stakeholders, 53–54lessons learned from experience,

49–55partially unified regulator, 37, 38preconditions for, 41–42processes and obstacles, 38, 39–40t,

92structure of, 39–40tsupervision under, 38, 41support by political will of major

stakeholders, 42–43in transition economies, 42unfolding debate on, 38, 41–45

unified financial services supervisionframework for, 57–87Latvian model, 59–74preliminary issues, 58–59Scandinavian approach, 74–81twin peaks model, 53UK approach, 82–87

United Kingdom (UK)See also Financial Services

Authority (FSA: UK)central bank independence in, 22–24FSMC in, 86–87insider dealing prohibition, 85

institutional and regulatoryframework in, 6

international standards and, 82–83memorandum of understanding on

information sharing, 92ombudsman, 84–85power to regulate and supervise in, 5recent regulatory developments in,

84–87Scandinavian unified financial

supervision compared, 81single regulator in, 10–11unified financial services regulator

in, 38, 42, 43–44, 48, 50, 51, 53

unified financial servicessupervision in, 82–84

United States, regulators in, 6See also specific government

agenciesuniversal banking, 92Uruguay, 53

Venezuela, 30, 53Venezuela Central Bank, 53

winding up, 32World Bank, 20, 37, 54–55

Zambia, 38, 46–47, 57, 92




by Kishor Uprety










Publishers, Moscow








L E G A L A S P E C T S O F

F I N A N C I A L S E R V I C E S

R E G U L AT I O N A N D

T H E C O N C E P T O F A

U N I F I E D R E G U L AT O R

Kenneth Kaoma Mwenda

LAW, JUSTICE, AND

DEVELOPMENT SERIES

The regulation and supervision of financial services has traditionally beenorganized around individual agencies, each with distinct and separateresponsibilities for banking, securities, and insurance. The services andproducts of the financial sector, however, have evolved significantly inrecent years. In response, there has been a trend among some countriestoward restructuring the financial supervisory function, in particular creatingunified regulatory agencies (agencies that supervise two or more of theseareas). But there is still little evidence of broadly accepted standards of bestpractice for the structuring of these unified agencies. Until there is a longertrack record of experience with unified regulators, it is difficult to come tofirm conclusions about their optimal organizational structure.

Legal Aspects of Financial Services Regulation and the Concept of a UnifiedRegulator examines legal and policy considerations of creating a regulatoryand institutional framework for unified financial services supervision. Thebook analyzes different regulatory and institutional constraints that acountry might face as it moves towards the introduction of a unifiedsupervisory agency. The book also highlights favorable conditions andfactors that could support the introduction of such a unified agency. Theauthor lays out important jurisprudential and interdisciplinary issues thatneed to be considered when developing regulatory and institutional modelsof unified financial services supervision.

Kenneth Kaoma Mwenda is senior counsel in the Legal Vice Presidency ofthe World Bank. A Rhodes Scholar, the author holds a PhD in Law from theUniversity of Warwick (UK), where he also served as a Law Lecturer. He alsoholds law degrees from Oxford University (UK) and the University of Zambiaas well as an MBA degree from the University of Hull (UK). The author, aCertified Anti-Money Laundering Specialist (ACAMS, USA), is a recognizedexpert in the fields of international and comparative corporate law andfinancial services regulation, and has published extensively in these fields.

LE

GA

L A

SP

EC

TS

OF

FIN

AN

CIA

L S

ER

VIC

ES

RE

GU

LA

TIO

N A

ND

T

HE

CO

NC

EP

T O

F A

UN

IFIE

D R

EG

UL

AT

OR

LA

W, JU

ST

ICE

, AN

D

DE

VE

LO

PM

EN

T S

ER

IES

ISBN 0-8213-6459-6

Legal Aspects of Financial Services Regulation and the Concept...

Documents

Transcript of Legal Aspects of Financial Services Regulation and the Concept...